Is Velpic Limited (ASX:VPC) Really As Financially Strong As Its Balance Sheet Indicates?

In any company, including Velpic Limited (ASX:VPC) which has zero-debt on its balance sheet, there are well known benefits of including debt in the capital structure, primarily a lower cost of capital — due to debtholders’ higher claim on assets in the event of liquidation and tax benefits to the company on interest payments.

A drop in the cost of capital beefs up a company’s valuation as the same is used to discount its future cash flows to arrive at the intrinsic value — an estimate of its worth right now. This is one of the reasons – given interest rates at record lows – that most companies tremendously raised debt in their capital structure over the past few years.

On the other hand, rate hikes are imminent, it’s a part of the broader economic cycle. No-debt companies will clearly be in a stronger cash position compared to companies of which most, if not all, will be forced to retire a chunk of their debt due to rising costs. Higher the interest rates, higher the cost of debt. Although zero-debt makes Velpic’s financial strength analysis lot more stressful, there are other metrics to check its financial health. These are a few basic checks to assess the financial health of companies with no debt. View our latest analysis for Velpic

Is Velpic right in choosing financial flexibility instead of a lower cost of capital?

ASX-VPC-income-statement-Thu-Jan-12-2017

Zero-debt allows substantial financial flexibility, especially for small-cap companies like VPC with its market cap of USD $6 Million as they have limited capability of raising large sums through capital markets. However, choosing financial flexibility over capital returns is logical only if it’s a high-growth company. VPC’s revenue grew 3915.38% over the past year, so it’s acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

Does VPC’s cash and short-term assets cover its short-term commitments?

ASX-VPC-net-worth-Thu-Jan-12-2017

Given zero long-term debt on its balance sheet, Velpic has no solvency issues. Solvency is 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, which are mostly comprised of payments to suppliers, bank loans and debts due over the next twelve months. To cover them, a company must have more liquid assets than these obligations. In VPC’s case, its short-term assets of $3 Million exceed the short-term liabilities of $1 Million, indicating sound liquidity position.

Conclusion

Velpic is a fast growing company with a revenue growth of 3915.38% over the past year, making financial flexibility a valuable option for the company. In addition, its current assets cover current liabilities, giving it enough liquidity to operate smoothly in the short-term. Now I recommend you check out our latest free analysis report to see what are VPC’s growth prospects and whether it could be considered an undervalued opportunity.

PS. If you are not interested in Velpic anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.