Yahoo Finance REX American Resources Corporation (NYSE:REX): Time For A Financial Health Check
REX American Resources Corporation (NYSE:REX), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is REX will have to follow strict debt obligations which will reduce its financial flexibility. While REX has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
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Does REX’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on REX’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if REX is a high-growth company. REX’s revenue growth over the past year is a single-digit 3.9% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does REX’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, REX American Resources has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at REX’s US$20m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$247m, with a current ratio of 12.61x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
As a high-growth company, it may be beneficial for REX to have some financial flexibility, hence zero-debt. Since there is also no concerns around REX’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for REX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research REX American Resources to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for REX’s future growth? Take a look at our free research report of analyst consensus for REX’s outlook.
Valuation: What is REX 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 REX 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 editorial-team@simplywallst.com.
