What Investors Should Know About Ritchie Bros. Auctioneers Incorporated's (NYSE:RBA) Financial Strength

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) with a market-capitalization of US$3.4b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at RBA’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RBA here.

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How much cash does RBA generate through its operations?

Over the past year, RBA has reduced its debt from US$826m to US$771m – this includes long-term debt. With this reduction in debt, RBA currently has US$229m remaining in cash and short-term investments , ready to deploy into the business. Moreover, RBA has generated cash from operations of US$145m in the last twelve months, leading to an operating cash to total debt ratio of 19%, indicating that RBA’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RBA’s case, it is able to generate 0.19x cash from its debt capital.

Can RBA pay its short-term liabilities?

With current liabilities at US$535m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.28x. Usually, for Commercial Services 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.

Is RBA’s debt level acceptable?

With a debt-to-equity ratio of 94%, RBA can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if RBA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For RBA, the ratio of 4.4x suggests that interest is appropriately 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:

RBA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for RBA's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ritchie Bros. Auctioneers to get a better picture of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for RBA’s future growth? Take a look at our free research report of analyst consensus for RBA’s outlook.
2. Valuation: What is RBA 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 RBA 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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.