What does RHC Capital Corporation's (CVE:RHC) Balance Sheet Tell Us About Its Future?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like RHC Capital Corporation (CVE:RHC), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While RHC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock's financial health, which I believe provides a ballpark estimate of their financial health status. View out our latest analysis for RHC Capital

Is RHC growing fast enough to value financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on RHC’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if RHC is a high-growth company.

Does RHC’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, RHC Capital has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at CA$141.95k, it seems that the business has been able to meet these commitments with a current assets level of CA$1.87m, leading to a 13.15x current account ratio. However, a ratio greater than 3x may be considered as too high, as RHC could be holding too much capital in a low-return investment environment.

Next Steps:

RHC is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I'm sure RHC has company-specific issues impacting its capital structure decisions. You should continue to research RHC Capital to get a more holistic view of the stock by looking at:

1. Historical Performance: What has RHC'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.
2. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.