While small-cap stocks, such as Videlio SA (ENXTPA:VDLO) with its market cap of €40.26M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. 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 VDLO here.
How does VDLO’s operating cash flow stack up against its debt?
Over the past year, VDLO has reduced its debt from €18.52M to €14.28M , which comprises of short- and long-term debt. With this reduction in debt, VDLO’s cash and short-term investments stands at €28.34M for investing into the business. Moreover, VDLO has generated €9.01M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 63.09%, indicating that VDLO’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In VDLO’s case, it is able to generate 0.63x cash from its debt capital.
Can VDLO pay its short-term liabilities?
Looking at VDLO’s most recent €87.68M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. For Electronic companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is VDLO’s debt level acceptable?
With a debt-to-equity ratio of 68.08%, VDLO 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. But since VDLO is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
VDLO’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. I admit this is a fairly basic analysis for VDLO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Videlio to get a more holistic view of the small-cap by looking at:
- 1. Historical Performance: What has VDLO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. 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.