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Investors are always looking for growth in small-cap stocks like Viking Line ABP (HEL:VIK1V), with a market cap of €164m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into VIK1V here.
Does VIK1V produce enough cash relative to debt?
Over the past year, VIK1V has reduced its debt from €151m to €127m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at €62m , ready to deploy into the business. Additionally, VIK1V has produced €33m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 26%, meaning that VIK1V’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VIK1V’s case, it is able to generate 0.26x cash from its debt capital.
Can VIK1V meet its short-term obligations with the cash in hand?
Looking at VIK1V’s €96m 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 1.14x. Generally, for Hospitality companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is VIK1V’s debt level acceptable?
With a debt-to-equity ratio of 55%, VIK1V can be considered as an above-average leveraged company. This is not uncommon for a small-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 VIK1V’s case, the ratio of 3.25x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VIK1V’s high interest coverage is seen as responsible and safe practice.
Although VIK1V’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around VIK1V’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VIK1V’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Viking Line ABP to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VIK1V’s future growth? Take a look at our free research report of analyst consensus for VIK1V’s outlook.
- Valuation: What is VIK1V 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 VIK1V 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.