Radisys Corporation (NASDAQ:RSYS) is a company I’ve been following for a while, and although it’s currently trading below its fair value, I have reasons to believe it may not actually reach this figure. The biggest risks I see are around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Firstly, a quick intro on the company – Radisys Corporation provides telecom solutions worldwide. Founded in 1987, it currently operates in United States at a market cap of US$27.57M.
With falling revenues (year-on-year growth rate of -37.02%) I decided to dig a bit deeper into whether this was a one-off occurrence. A consensus of 4 US electronic equipment, instruments and components analysts covering the stock illustrates the trend may continue into the foreseeable future. Looking at their predictions, RSYS’s revenue level is estimated to decline by -26.18% by 2020. As RSYS is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$52.60M to -US$20.22M.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. Alarm bells rang in my head when I saw RSYS’s debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere -74.30% of this large debt amount. Furthemore, its debt-to-equity ratio has also been increasing from 27.83% five years ago. Although, its interest income is able to cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of RSYS’s financial health lowers my conviction around the sustainability of the business going forward. RSYS has poor near-term liquidity, with short term assets (cash and other liquid assets) unable to cover its upcoming liabilities in the next year. However, one reason I do like RSYS as a business is its low level of fixed assets on its balance sheet (13.62% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. RSYS has virtually no fixed assets, which minimizes its downside risk.
RSYS is now trading at US$0.70 per share. At 39.41 million shares, that’s a US$27.57M market cap, which is too high compared to its peers based on its industry and adjusted for its asset level. Currently, it’s overvalued by 96.28%, with a PB ratio of 4.19x vs. the industry average of 2.14x.
RSYS is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, RSYS doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.