Red Eagle Mining Corporation (TSX:R) is a small-cap stock with a market capitalization of CA$107.59M. 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 R is not presently profitable, it’s vital to evaluate 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into R here.
Does R generate an acceptable amount of cash through operations?
Over the past year, R has ramped up its debt from US$14.11M to US$64.67M – this includes both the current and long-term debt. With this rise in debt, R currently has US$4.20M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of R’s operating efficiency ratios such as ROA here.
Does R’s liquid assets cover its short-term commitments?
With current liabilities at US$34.71M, the company is not able to meet these obligations given the level of current assets of US$9.05M, with a current ratio of 0.26x below the prudent level of 3x.
Does R face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 97.38%, R can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since R is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
R’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how R has been performing in the past. I recommend you continue to research Red Eagle Mining to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has R’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.