While small-cap stocks, such as Verbicom S.A. (WSE:VRB) with its market cap of zł19m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since VRB is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into VRB here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
VRB’s Debt (And Cash Flows)
Over the past year, VRB has reduced its debt from zł10m to zł5.0m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at zł9.1m , ready to be used for running the business. On top of this, VRB has produced zł149k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 3.0%, indicating that VRB’s debt is not covered by operating cash.
Can VRB pay its short-term liabilities?
Looking at VRB’s zł39m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of zł46m, with a current ratio of 1.18x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Telecom companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can VRB service its debt comfortably?
With debt reaching 56% of equity, VRB may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since VRB is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although VRB’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. Since there is also no concerns around VRB's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how VRB has been performing in the past. You should continue to research Verbicom to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VRB’s future growth? Take a look at our free research report of analyst consensus for VRB’s outlook.
- Historical Performance: What has VRB'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.