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Vidrala, S.A. (BME:VID) is a small-cap stock with a market capitalization of €2.1b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into VID here.
Does VID Produce Much Cash Relative To Its Debt?
Over the past year, VID has reduced its debt from €532m to €434m – this includes long-term debt. With this debt payback, VID’s cash and short-term investments stands at €23m , ready to be used for running the business. Additionally, VID has produced €203m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 47%, indicating that VID’s current level of operating cash is high enough to cover debt.
Can VID pay its short-term liabilities?
Looking at VID’s €302m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.49x. The current ratio is the number you get when you divide current assets by current liabilities. For Packaging 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.
Does VID face the risk of succumbing to its debt-load?
With debt reaching 71% of equity, VID 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. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VID’s case, the ratio of 22.2x suggests that interest is comfortably 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.
VID’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. Since there is also no concerns around VID’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how VID has been performing in the past. I suggest you continue to research Vidrala to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VID’s future growth? Take a look at our free research report of analyst consensus for VID’s outlook.
- Valuation: What is VID 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 VID 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.