Reed’s, Inc. (NASDAQ:REED): Time For A Financial Health Check

Reed’s, Inc. (NASDAQ:REED) is a small-cap stock with a market capitalization of US$126m. 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 REED is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into REED here.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

REED’s Debt (And Cash Flows)

REED’s debt levels have fallen from US$12m to US$7.9m over the last 12 months , which includes long-term debt. With this reduction in debt, REED currently has US$2.7m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of REED’s operating efficiency ratios such as ROA here.

Does REED’s liquid assets cover its short-term commitments?

Looking at REED’s US$8.2m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. The current ratio is calculated by dividing current assets by current liabilities. For Beverage 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.

NasdaqCM:REED Historical Debt, May 21st 2019
NasdaqCM:REED Historical Debt, May 21st 2019

Can REED service its debt comfortably?

Since total debt levels exceed equity, REED is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since REED 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.

Next Steps:

REED’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. Since there is also no concerns around REED’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for REED’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Reed’s to get a more holistic view of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.