RM2 International SA (LON:RM2) is a small-cap stock with a market capitalization of UK£51.24m. 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 RM2 is not presently profitable, it’s essential to understand 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into RM2 here.
How much cash does RM2 generate through its operations?
RM2’s debt level has been constant at around UK£1.75m over the previous year comprising of short- and long-term debt. At this current level of debt, RM2’s cash and short-term investments stands at UK£3.88m , ready to deploy 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 take a look at some of RM2’s operating efficiency ratios such as ROA here.
Can RM2 pay its short-term liabilities?
With current liabilities at UK£11.67m, the company has been able to meet these obligations given the level of current assets of UK£29.76m, with a current ratio of 2.55x. For Packaging companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is RM2’s debt level acceptable?RM2’s level of debt is low relative to its total equity, at 3.17%. This range is considered safe as RM2 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is virtually non-existent with RM2, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Although RM2’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for RM2’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research RM2 International to get a more holistic view of the stock by looking at:
- Historical Performance: What has RM2’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.