While small-cap stocks, such as VSE Corporation (NASDAQ:VSEC) with its market cap of US$352m, 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, 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into VSEC here.
How much cash does VSEC generate through its operations?
VSEC has sustained its debt level by about US$194m 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$1.6m for investing into the business. Moreover, VSEC has generated cash from operations of US$14m in the last twelve months, leading to an operating cash to total debt ratio of 7.4%, meaning that VSEC’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VSEC’s case, it is able to generate 0.074x cash from its debt capital.
Can VSEC meet its short-term obligations with the cash in hand?
Looking at VSEC’s US$95m in current liabilities, the company has been able to meet these commitments with a current assets level of US$273m, leading to a 2.87x current account ratio. Generally, for Commercial Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is VSEC’s debt level acceptable?
With a debt-to-equity ratio of 61%, VSEC can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some 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 after interest and tax at least three times its net interest payments is considered financially sound. In VSEC’s case, the ratio of 5.96x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VSEC’s high interest coverage is seen as responsible and safe practice.
VSEC’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 VSEC’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 VSEC has been performing in the past. I suggest you continue to research VSE to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VSEC’s future growth? Take a look at our free research report of analyst consensus for VSEC’s outlook.
- Valuation: What is VSEC 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 VSEC 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 firstname.lastname@example.org.