Real Estate Investar Group Limited (ASX:REV) is a small-cap stock with a market capitalization of AU$2.8m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that REV is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into REV here.
How much cash does REV generate through its operations?
Over the past year, REV has ramped up its debt from AU$235k to AU$335k . With this increase in debt, REV’s cash and short-term investments stands at AU$107k for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of REV’s operating efficiency ratios such as ROA here.
Can REV pay its short-term liabilities?
Looking at REV’s AU$2.2m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of AU$1.6m, with a current ratio of 0.73x.
Is REV’s debt level acceptable?
REV is a relatively highly levered company with a debt-to-equity of 86%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since REV is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although REV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for REV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Real Estate Investar Group to get a more holistic view of the stock by looking at:
- Historical Performance: What has REV’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.