While small-cap stocks, such as Vectrus, Inc. (NYSE:VEC) with its market cap of US$313m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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 recommend you dig deeper yourself into VEC here.
How does VEC’s operating cash flow stack up against its debt?
Over the past year, VEC has maintained its debt levels at around US$74m – this includes long-term debt. At this constant level of debt, VEC currently has US$66m remaining in cash and short-term investments for investing into the business. Moreover, VEC has generated US$40m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 54%, signalling that VEC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VEC’s case, it is able to generate 0.54x cash from its debt capital.
Can VEC pay its short-term liabilities?
At the current liabilities level of US$225m, it appears that the company has been able to meet these commitments with a current assets level of US$313m, leading to a 1.39x current account ratio. Generally, for Aerospace & Defense companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is VEC’s debt level acceptable?
With debt at 33% of equity, VEC may be thought of as appropriately levered. This range is considered safe as VEC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether VEC 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 VEC’s, case, the ratio of 9.98x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VEC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
VEC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for VEC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Vectrus to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VEC’s future growth? Take a look at our free research report of analyst consensus for VEC’s outlook.
- Valuation: What is VEC 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 VEC 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.
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