While small-cap stocks, such as RigNet Inc (NASDAQ:RNET) with its market cap of US$223.65m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into RNET here.
Does RNET produce enough cash relative to debt?
Over the past year, RNET has maintained its debt levels at around US$56.88m – this includes both the current and long-term debt. At this constant level of debt, RNET currently has US$21.86m remaining in cash and short-term investments , ready to deploy into the business. Additionally, RNET has produced cash from operations of US$18.51m during the same period of time, leading to an operating cash to total debt ratio of 32.54%, signalling that RNET’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In RNET’s case, it is able to generate 0.33x cash from its debt capital.
Can RNET pay its short-term liabilities?
At the current liabilities level of US$43.95m liabilities, the company has been able to meet these commitments with a current assets level of US$85.87m, leading to a 1.95x current account ratio. Usually, for Energy Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can RNET service its debt comfortably?
With debt reaching 50.89% 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. But since RNET is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.Next Steps:
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. Since there is also no concerns around RNET’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure RNET has company-specific issues impacting its capital structure decisions. You should 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.