While small-cap stocks, such as 21Vianet Group, Inc. (NASDAQ:VNET) with its market cap of US$966m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. IT companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into VNET here.
How does VNET’s operating cash flow stack up against its debt?
VNET’s debt levels have fallen from CN¥4.6b to CN¥3.4b over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥2.6b , ready to deploy into the business. Moreover, VNET has generated cash from operations of CN¥573m over the same time period, leading to an operating cash to total debt ratio of 17%, meaning that VNET’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VNET’s case, it is able to generate 0.17x cash from its debt capital.
Does VNET’s liquid assets cover its short-term commitments?
With current liabilities at CN¥2.3b, the company has been able to meet these obligations given the level of current assets of CN¥4.9b, with a current ratio of 2.15x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can VNET service its debt comfortably?
VNET is a relatively highly levered company with a debt-to-equity of 62%. This is not uncommon for a small-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 VNET’s case, the ratio of 1.11x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
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. Since there is also no concerns around VNET’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VNET’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research 21Vianet Group to get a better picture 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.
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.
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