Investors are always looking for growth in small-cap stocks like RigNet Inc (NASDAQ:RNET), with a market cap of US$316m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Energy Services industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into RNET here.
How much cash does RNET generate through its operations?
RNET has built up its total debt levels in the last twelve months, from US$47m to US$58m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$18m for investing into the business. Moreover, RNET has generated US$21m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 37%, indicating that RNET’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In RNET’s case, it is able to generate 0.37x cash from its debt capital.
Can RNET meet its short-term obligations with the cash in hand?
Looking at RNET’s most recent US$54m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$94m, leading to a 1.75x current account ratio. Usually, for Energy Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does RNET face the risk of succumbing to its debt-load?
With debt reaching 53% of equity, RNET may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since RNET 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.
Although RNET’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how RNET has been performing in the past. I suggest you continue to research RigNet to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RNET’s future growth? Take a look at our free research report of analyst consensus for RNET’s outlook.
- Valuation: What is RNET 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 RNET 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 email@example.com.