Yahoo Finance Is Recipe Unlimited Corporation's (TSE:RECP) Balance Sheet Strong Enough To Weather A Storm?
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Investors are always looking for growth in small-cap stocks like Recipe Unlimited Corporation (TSE:RECP), with a market cap of CA$1.6b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into RECP here.
RECP’s Debt (And Cash Flows)
Over the past year, RECP has ramped up its debt from CA$405m to CA$473m , which includes long-term debt. With this increase in debt, RECP currently has CA$49m remaining in cash and short-term investments , ready to be used for running the business. Moreover, RECP has produced CA$197m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42%, meaning that RECP’s operating cash is sufficient to cover its debt.
Does RECP’s liquid assets cover its short-term commitments?
With current liabilities at CA$461m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.43x. The current ratio is calculated by dividing current assets by current liabilities.
Is RECP’s debt level acceptable?
With a debt-to-equity ratio of 97%, RECP can be considered as an above-average 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. We can test if RECP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For RECP, the ratio of 13.1x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although RECP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure RECP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Recipe Unlimited to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RECP’s future growth? Take a look at our free research report of analyst consensus for RECP’s outlook.
Valuation: What is RECP 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 RECP 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.
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