While small-cap stocks, such as 21Vianet Group Inc (NASDAQ:VNET) with its market cap of US$883.15M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Internet companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into VNET here.
Does VNET generate an acceptable amount of cash through operations?
Over the past year, VNET has reduced its debt from CN¥3.39B to CN¥3.19B – this includes both the current and long-term debt. With this debt payback, VNET’s cash and short-term investments stands at CN¥1.59B for investing into the business. On top of this, VNET has generated cash from operations of CN¥83.62M during the same period of time, resulting in an operating cash to total debt ratio of 2.62%, indicating that VNET’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In VNET’s case, it is able to generate 0.026x cash from its debt capital.
Can VNET meet its short-term obligations with the cash in hand?
Looking at VNET’s most recent CN¥4.37B liabilities, the company has been able to meet these commitments with a current assets level of CN¥5.20B, leading to a 1.19x current account ratio. Generally, for Internet companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is VNET’s debt level acceptable?
VNET is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since VNET is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
VNET’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how VNET has been performing in the past. I suggest you continue to research 21Vianet Group to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. Historical Performance: What has VNET’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 VNET’s historicals for more clarity.
- 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.