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Investors are always looking for growth in small-cap stocks like 21Vianet Group, Inc. (NASDAQ:VNET), with a market cap of US$852m. However, an important fact which most ignore is: how financially healthy is the business? Since VNET is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into VNET here.
Does VNET Produce Much Cash Relative To Its Debt?
VNET has built up its total debt levels in the last twelve months, from CN¥3.0b to CN¥4.0b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥2.3b , ready to be used for running the business. On top of this, VNET has generated CN¥642m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 16%, indicating that VNET’s operating cash is less than its debt.
Does VNET’s liquid assets cover its short-term commitments?
Looking at VNET’s CN¥2.3b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. The current ratio is the number you get when you divide current assets by current liabilities. For IT companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is VNET’s debt level acceptable?
VNET is a relatively highly levered company with a debt-to-equity of 59%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since VNET is presently unprofitable, 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.
Although VNET’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 VNET has company-specific issues impacting its capital structure decisions. You should continue to research 21Vianet Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VNET’s future growth? Take a look at our free research report of analyst consensus for VNET’s outlook.
- 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.
- 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.