Investors are always looking for growth in small-cap stocks like Valmont Industries, Inc. (NYSE:VMI), with a market cap of US$2.8b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into VMI here.
VMI’s Debt (And Cash Flows)
VMI has sustained its debt level by about US$753m over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$313m , ready to be used for running the business. On top of this, VMI has generated cash from operations of US$153m during the same period of time, leading to an operating cash to total debt ratio of 20%, signalling that VMI’s current level of operating cash is high enough to cover debt.
Can VMI pay its short-term liabilities?
With current liabilities at US$409m, the company has been able to meet these obligations given the level of current assets of US$1.3b, with a current ratio of 3.28x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can VMI service its debt comfortably?
VMI is a relatively highly levered company with a debt-to-equity of 66%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VMI’s case, the ratio of 6.41x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as VMI’s high interest coverage is seen as responsible and safe practice.
VMI’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. Since there is also no concerns around VMI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how VMI has been performing in the past. You should continue to research Valmont Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VMI’s future growth? Take a look at our free research report of analyst consensus for VMI’s outlook.
- Valuation: What is VMI 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 VMI 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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