What Does Russel Metals Inc.'s (TSE:RUS) Balance Sheet Tell Us About It?

Russel Metals Inc. (TSE:RUS) is a small-cap stock with a market capitalization of CA$1.5b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into RUS here.

Does RUS Produce Much Cash Relative To Its Debt?

RUS's debt levels surged from CA$504m to CA$572m over the last 12 months – this includes long-term debt. With this growth in debt, RUS currently has CA$124m remaining in cash and short-term investments , ready to be used for running the business. Additionally, RUS has produced CA$88m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that RUS’s debt is not covered by operating cash.

Can RUS pay its short-term liabilities?

With current liabilities at CA$645m, it appears that the company has been able to meet these obligations given the level of current assets of CA$1.8b, with a current ratio of 2.74x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can RUS service its debt comfortably?

RUS is a relatively highly levered company with a debt-to-equity of 57%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RUS's case, the ratio of 10.6x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although RUS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around RUS's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how RUS has been performing in the past. You should continue to research Russel Metals to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for RUS’s future growth? Take a look at our free research report of analyst consensus for RUS’s outlook.
2. Valuation: What is RUS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RUS is currently mispriced by the market.
3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.