Investors are always looking for growth in small-cap stocks like Virtus Health Limited (ASX:VRT), with a market cap of AU$316m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into VRT here.
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VRT’s Debt (And Cash Flows)
VRT’s debt levels surged from AU$148m to AU$184m over the last 12 months – this includes long-term debt. With this rise in debt, VRT currently has AU$19m remaining in cash and short-term investments to keep the business going. Additionally, VRT has generated cash from operations of AU$39m during the same period of time, resulting in an operating cash to total debt ratio of 21%, meaning that VRT’s operating cash is sufficient to cover its debt.
Can VRT pay its short-term liabilities?
At the current liabilities level of AU$54m, the company may not be able to easily meet these obligations given the level of current assets of AU$34m, with a current ratio of 0.63x. The current ratio is calculated by dividing current assets by current liabilities.
Can VRT service its debt comfortably?
With debt reaching 63% of equity, VRT may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if VRT’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 VRT, the ratio of 5.32x 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.
VRT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure VRT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Virtus Health to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VRT’s future growth? Take a look at our free research report of analyst consensus for VRT’s outlook.
- Valuation: What is VRT 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 VRT 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.