Investors are always looking for growth in small-cap stocks like Vonage Holdings Corp. (NYSE:VG), with a market cap of US$2.8b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into VG here.
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VG’s Debt (And Cash Flows)
Over the past year, VG has ramped up its debt from US$233m to US$619m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$18m , ready to be used for running the business. Additionally, VG has generated cash from operations of US$102m during the same period of time, resulting in an operating cash to total debt ratio of 17%, signalling that VG’s operating cash is less than its debt.
Can VG meet its short-term obligations with the cash in hand?
Looking at VG’s US$207m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$138m, with a current ratio of 0.66x. The current ratio is calculated by dividing current assets by current liabilities.
Does VG face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, VG is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if VG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VG, the ratio of 2.34x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although VG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for VG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Vonage Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VG’s future growth? Take a look at our free research report of analyst consensus for VG’s outlook.
- Valuation: What is VG 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 VG 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.
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