While small-cap stocks, such as Rentcomau Limited (ASX:RNT) with its market cap of AU$19.14m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Internet companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into RNT here.
Does RNT produce enough cash relative to debt?
RNT’s debt levels have fallen from AU$484.02k to AU$69.83k over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, RNT currently has AU$3.25m remaining in cash and short-term investments 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. For this article’s sake, I won’t be looking at this today, but you can examine some of RNT’s operating efficiency ratios such as ROA here.
Does RNT’s liquid assets cover its short-term commitments?
With current liabilities at AU$951.46k, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.68x. Though, a ratio greater than 3x may be considered as too high, as RNT could be holding too much capital in a low-return investment environment.
Can RNT service its debt comfortably?
With a debt-to-equity ratio of 2.25%, RNT’s debt level is relatively low. RNT is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for RNT, and the company also has the ability and headroom to increase debt if needed going forward.Next Steps:
RNT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for RNT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Rent.com.au to get a better picture of the stock by looking at:
- Historical Performance: What has RNT’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.