What does Vera Synthetic Limited's (NSE:VERA) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like Vera Synthetic Limited (NSE:VERA), with a market cap of ₹206m. 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. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into VERA here.

Does VERA produce enough cash relative to debt?

VERA's debt levels have fallen from ₹50m to ₹35m over the last 12 months , which also accounts for long term debt. With this debt repayment, VERA's cash and short-term investments stands at ₹316k , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of VERA’s operating efficiency ratios such as ROA here.

Does VERA’s liquid assets cover its short-term commitments?

At the current liabilities level of ₹89m, it seems that the business has been able to meet these obligations given the level of current assets of ₹175m, with a current ratio of 1.97x. Usually, for Luxury companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can VERA service its debt comfortably?

With a debt-to-equity ratio of 30%, VERA's debt level may be seen as prudent. VERA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if VERA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VERA, the ratio of 20.96x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as VERA’s high interest coverage is seen as responsible and safe practice.

Next Steps:

VERA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how VERA has been performing in the past. I suggest you continue to research Vera Synthetic to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for VERA’s future growth? Take a look at our free research report of analyst consensus for VERA’s outlook.
2. Historical Performance: What has VERA'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.
3. 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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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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.