Investors are always looking for growth in small-cap stocks like Vishay Precision Group, Inc. (NYSE:VPG), with a market cap of US$493m. 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’d encourage you to dig deeper yourself into VPG here.
VPG’s Debt (And Cash Flows)
VPG’s debt levels have fallen from US$32m to US$27m over the last 12 months , which includes long-term debt. With this debt payback, VPG’s cash and short-term investments stands at US$90m to keep the business going. Moreover, VPG has generated cash from operations of US$35m during the same period of time, leading to an operating cash to total debt ratio of 131%, signalling that VPG’s operating cash is sufficient to cover its debt.
Can VPG meet its short-term obligations with the cash in hand?
Looking at VPG’s US$55m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$215m, with a current ratio of 3.92x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, 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 VPG service its debt comfortably?
VPG’s level of debt is appropriate relative to its total equity, at 12%. This range is considered safe as VPG is not taking on too much debt obligation, which may be constraining for future growth. We can test if VPG’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 VPG, the ratio of 31.37x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving VPG ample headroom to grow its debt facilities.
Next Steps:
VPG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure VPG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Vishay Precision Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VPG’s future growth? Take a look at our free research report of analyst consensus for VPG’s outlook.
- Valuation: What is VPG 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 VPG 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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