While small-cap stocks, such as Volt Power Group Limited (ASX:VPR) with its market cap of AU$24.73m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into VPR here.
How does VPR’s operating cash flow stack up against its debt?
VPR has built up its total debt levels in the last twelve months, from AU$405.68k to AU$500.68k . With this growth in debt, VPR’s cash and short-term investments stands at AU$2.99m , ready to deploy into the business. On top of this, VPR has produced AU$170.35k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 34.02%, signalling that VPR’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VPR’s case, it is able to generate 0.34x cash from its debt capital.
Can VPR pay its short-term liabilities?
At the current liabilities level of AU$1.64m liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$3.60m, leading to a 2.19x current account ratio. Generally, for Renewable Energy companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does VPR face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 15.72%, VPR’s debt level may be seen as prudent. VPR is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether VPR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VPR’s, case, the ratio of 242x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as VPR’s high interest coverage is seen as responsible and safe practice.
VPR has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how VPR has been performing in the past. I suggest you continue to research Volt Power Group to get a better picture of the stock by looking at:
- Historical Performance: What has VPR’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 pass 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 firstname.lastname@example.org.