Investors are always looking for growth in small-cap stocks like 21Vianet Group Inc (NASDAQ:VNET), with a market cap of $890.97M. However, an important fact which most ignore is: how financially healthy is the business? Internet companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. 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 suggest 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¥3,385.8M to CN¥3,194.3M , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥1,595.0M for investing into the business. Additionally, VNET has produced CN¥83.6M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 2.62%, indicating that VNET’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In VNET’s case, it is able to generate 0.03x cash from its debt capital.
Can VNET meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥4,373.9M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥5,201.9M, with a current ratio of 1.19x. Usually, for internet companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is VNET’s debt level acceptable?
With total debt exceeding equities, VNET is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since VNET is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Are you a shareholder? VNET’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may change. You should always be researching market expectations for VNET’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, VNET could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for VNET to increase its operational efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. As a following step, you should take a look at VNET’s past performance analysis on our free platform to conclude on VNET’s financial health.
To help readers see pass 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.