VivoPower International PLC (NASDAQ:VVPR) is a small-cap stock with a market capitalization of US$18m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that VVPR is not presently profitable, it’s crucial 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 VVPR here.
VVPR’s Debt (And Cash Flows)
Over the past year, VVPR has reduced its debt from US$22m to US$19m – this includes long-term debt. With this debt repayment, VVPR currently has US$4.5m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of VVPR’s operating efficiency ratios such as ROA here.
Can VVPR pay its short-term liabilities?
At the current liabilities level of US$21m, it appears that the company has been able to meet these obligations given the level of current assets of US$30m, with a current ratio of 1.43x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Renewable Energy companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can VVPR service its debt comfortably?
VVPR is a relatively highly levered company with a debt-to-equity of 80%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since VVPR 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.
VVPR’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. Since there is also no concerns around VVPR's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure VVPR has company-specific issues impacting its capital structure decisions. I suggest you continue to research VivoPower International to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has VVPR'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.
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