Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Vermilion Energy Inc. (TSE:VET), with a market cap of CA$5.2b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at VET’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into VET here.
Does VET Produce Much Cash Relative To Its Debt?
VET’s debt levels surged from CA$1.3b to CA$1.9b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$27m , ready to be used for running the business. Moreover, VET has generated CA$816m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43%, meaning that VET’s current level of operating cash is high enough to cover debt.
Does VET’s liquid assets cover its short-term commitments?
Looking at VET’s CA$563m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$430m, leading to a current ratio of 0.76x. The current ratio is calculated by dividing current assets by current liabilities.
Is VET’s debt level acceptable?
VET is a relatively highly levered company with a debt-to-equity of 68%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In VET’s case, the ratio of 4.98x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving VET ample headroom to grow its debt facilities.
VET’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. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how VET has been performing in the past. I suggest you continue to research Vermilion Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VET’s future growth? Take a look at our free research report of analyst consensus for VET’s outlook.
- Valuation: What is VET 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 VET 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.
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