While small-cap stocks, such as 21Vianet Group Inc (NASDAQ:VNET) with its market cap of US$773.73M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Internet industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into VNET here.
Does VNET generate an acceptable amount of cash through operations?
Over the past year, VNET has maintained its debt levels at around CN¥3.04B – this includes both the current and long-term debt. At this current level of debt, VNET currently has CN¥2.50B remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of VNET’s operating efficiency ratios such as ROA here.
Can VNET meet its short-term obligations with the cash in hand?
Looking at VNET’s most recent CN¥1.78B liabilities, the company has been able to meet these obligations given the level of current assets of CN¥4.25B, with a current ratio of 2.39x. For Internet companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does VNET face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 58.44%, VNET 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. But since VNET is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
VNET’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for VNET’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research 21Vianet Group to get a more holistic view of the stock by looking at:
- 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 our analysis for more clarity.
- 2. 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 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.