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Mid-caps stocks, like Viva Energy Group Limited (ASX:VEA) with a market capitalization of AU$4.4b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. VEA’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into VEA here.
VEA’s Debt (And Cash Flows)
Over the past year, VEA has reduced its debt from AU$290m to AU$159m , which includes long-term debt. With this debt payback, VEA currently has AU$124m remaining in cash and short-term investments , ready to be used for running the business. Moreover, VEA has generated AU$287m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 180%, meaning that VEA’s operating cash is sufficient to cover its debt.
Can VEA meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$2.1b, it seems that the business has been able to meet these obligations given the level of current assets of AU$2.4b, with a current ratio of 1.18x. The current ratio is calculated by dividing current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is VEA’s debt level acceptable?
VEA’s level of debt is low relative to its total equity, at 5.7%. This range is considered safe as VEA is not taking on too much debt obligation, which may be constraining for future growth. We can test if VEA’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 VEA, the ratio of 9.85x suggests that interest is appropriately 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.
VEA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for VEA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Viva Energy Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VEA’s future growth? Take a look at our free research report of analyst consensus for VEA’s outlook.
- Valuation: What is VEA 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 VEA 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.