Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Vicat SA (EPA:VCT), with a market cap of €1.9b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at VCT’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into VCT here.
Does VCT produce enough cash relative to debt?
Over the past year, VCT has reduced its debt from €1.3b to €1.2b , which includes long-term debt. With this debt repayment, VCT’s cash and short-term investments stands at €278m , ready to deploy into the business. Additionally, VCT has generated €397m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 33%, indicating that VCT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VCT’s case, it is able to generate 0.33x cash from its debt capital.
Does VCT’s liquid assets cover its short-term commitments?
Looking at VCT’s €787m in current liabilities, the company has been able to meet these commitments with a current assets level of €1.4b, leading to a 1.73x current account ratio. For Basic Materials 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 VCT’s debt level acceptable?
With a debt-to-equity ratio of 51%, VCT can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In VCT’s case, the ratio of 10.81x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
VCT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for VCT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Vicat to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VCT’s future growth? Take a look at our free research report of analyst consensus for VCT’s outlook.
- Valuation: What is VCT 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 VCT 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.