Investors are always looking for growth in small-cap stocks like Vicat SA (EPA:VCT), with a market cap of €1.8b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, 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. However, since I only look at basic financial figures, I suggest you dig deeper yourself into VCT here.
Does VCT produce enough cash relative to debt?
Over the past year, VCT has reduced its debt from €1.3b to €1.2b , which also accounts for long term debt. With this debt repayment, VCT’s cash and short-term investments stands at €278m , ready to deploy into the business. Moreover, VCT has produced €397m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 33%, signalling that VCT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VCT’s case, it is able to generate 0.33x cash from its debt capital.
Can VCT meet its short-term obligations with the cash in hand?
With current liabilities at €787m, it appears that the company has been able to meet these commitments with a current assets level of €1.4b, leading to a 1.73x current account ratio. Usually, for Basic Materials companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can VCT service its debt comfortably?
With debt reaching 51% of equity, VCT may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether VCT 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 VCT’s, case, the ratio of 10.81x 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.
Next Steps:
VCT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure VCT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Vicat to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VCT’s future growth? Take a look at our free research report of analyst consensus for VCT’s outlook.
- Valuation: What is VCT 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 VCT 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 editorial-team@simplywallst.com.