While small-cap stocks, such as Vermilion Energy Inc. (TSE:VET) with its market cap of CA$5.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes 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. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into VET here.
VET’s Debt (And Cash Flows)
VET’s debt levels surged from CA$1.3b to CA$1.9b over the last 12 months , which accounts for long term debt. With this rise in debt, VET’s cash and short-term investments stands at CA$27m to keep the business going. Moreover, VET has produced CA$816m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43%, signalling that VET’s debt is appropriately covered by operating cash.
Can VET meet its short-term obligations with the cash in hand?
Looking at VET’s CA$563m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of CA$430m, with a current ratio of 0.76x. The current ratio is the number you get when you divide current assets by current liabilities.
Can VET service its debt comfortably?
With debt reaching 68% of equity, VET may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether VET 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 VET’s, case, the ratio of 4.98x 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.
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 small-cap. This is only a rough assessment of financial health, and I’m sure VET has company-specific issues impacting its capital structure decisions. 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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