VSE Corporation (NASDAQ:VSEC) is a small-cap stock with a market capitalization of US$354m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into VSEC here.
VSEC’s Debt (And Cash Flows)
VSEC has shrunk its total debt levels in the last twelve months, from US$195m to US$181m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$357k to keep the business going. On top of this, VSEC has produced cash from operations of US$19m over the same time period, resulting in an operating cash to total debt ratio of 10%, meaning that VSEC’s debt is not covered by operating cash.
Can VSEC meet its short-term obligations with the cash in hand?
Looking at VSEC’s US$105m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$281m, with a current ratio of 2.68x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable 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 55%, VSEC can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if VSEC’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 VSEC, the ratio of 5.91x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as VSEC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although VSEC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure VSEC has company-specific issues impacting its capital structure decisions. You should continue to research VSE to get a better picture 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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