Investors are always looking for growth in small-cap stocks like Ruth’s Hospitality Group Inc (NASDAQ:RUTH), with a market cap of US$858.36m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 RUTH here.
How much cash does RUTH generate through its operations?
RUTH’s debt levels surged from US$14.00m to US$43.00m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$2.17m , ready to deploy into the business. Moreover, RUTH has generated cash from operations of US$62.69m during the same period of time, resulting in an operating cash to total debt ratio of 145.79%, indicating that RUTH’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RUTH’s case, it is able to generate 1.46x cash from its debt capital.
Can RUTH pay its short-term liabilities?
At the current liabilities level of US$73.77m liabilities, the company is not able to meet these obligations given the level of current assets of US$26.14m, with a current ratio of 0.35x below the prudent level of 3x.
Can RUTH service its debt comfortably?
With debt reaching 49.09% of equity, RUTH may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In RUTH’s case, the ratio of 50.68x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RUTH ample headroom to grow its debt facilities.Next Steps:
RUTH’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for RUTH’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ruth’s Hospitality Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RUTH’s future growth? Take a look at our free research report of analyst consensus for RUTH’s outlook.
- Valuation: What is RUTH 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 RUTH is currently mispriced by the market.
- 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.