Despite stock woes, Rite-Aid has the cash to survive
— -- A: Rite-Aid has been a sick stock for a long time, and investors who assume the company can be nursed back to health have been disappointed.
The last time Rite-Aid stock was above $10 a share was in 1999. More recently, it was pounded in 2007 and 2008. And although it's up more than 200% this year, to around $1.08 a share, it's clearly a stock that's best left alone, as I warned here most recently.
Can the company survive? That's a different question than whether or not you should invest in the stock. To figure this out, look at the company's cash burn rate and its access to cash.
Judging from the company's recent results, you can make a case that Rite-Aid will survive. The three months ended Feb. 28, 2009, the company generated cash from operations of $324.8 million. Even if you deduct the $59.4 million the company consumed for capital improvements, the company had free-cash-flow during the period of $265.4 million. Companies that generate that much cash definitely have a reason to live.
Another indicator is Altman's Z-Score for predicting bankruptcy. When the score is below 1.2, you should worry about survival. Rite-Aid's Z-Score the past 12 months was 2.4, nowhere near the level of deep concern.
At this time, the two indicators described aren't pointing to any impending collapse of Rite Aid. That doesn't mean there might not be store closings or layoffs. It appears, though, the company has the resources to stay in business unless things deteriorate considerably.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
