While small-cap stocks, such as Visteon Corporation (NASDAQ:VC) with its market cap of US$2.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to 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, this is just a partial view of the stock, and I recommend you dig deeper yourself into VC here.
Does VC Produce Much Cash Relative To Its Debt?
VC's debt level has been constant at around US$405m over the previous year which accounts for long term debt. At this constant level of debt, VC currently has US$463m remaining in cash and short-term investments , ready to be used for running the business. Moreover, VC has produced cash from operations of US$204m during the same period of time, resulting in an operating cash to total debt ratio of 50%, signalling that VC’s debt is appropriately covered by operating cash.
Can VC pay its short-term liabilities?
With current liabilities at US$721m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.3b, with a current ratio of 1.8x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Auto Components companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is VC’s debt level acceptable?
VC is a relatively highly levered company with a debt-to-equity of 70%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VC's case, the ratio of 31.57x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as VC’s high interest coverage is seen as responsible and safe practice.
Although VC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure VC has company-specific issues impacting its capital structure decisions. You should continue to research Visteon to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VC’s future growth? Take a look at our free research report of analyst consensus for VC’s outlook.
- Valuation: What is VC 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 VC 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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