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Is Venator Materials PLC's (NYSE:VNTR) Balance Sheet A Threat To Its Future?

Simply Wall St

Venator Materials PLC (NYSE:VNTR) is a small-cap stock with a market capitalization of US$478m. 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 VNTR is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into VNTR here.

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VNTR’s Debt (And Cash Flows)

VNTR's debt level has been constant at around US$841m over the previous year including long-term debt. At this constant level of debt, VNTR's cash and short-term investments stands at US$80m to keep the business going. On top of this, VNTR has generated US$202m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24%, meaning that VNTR’s operating cash is sufficient to cover its debt.

Can VNTR meet its short-term obligations with the cash in hand?

Looking at VNTR’s US$487m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.1b, leading to a 2.18x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:VNTR Historical Debt, May 24th 2019

Can VNTR service its debt comfortably?

VNTR is a relatively highly levered company with a debt-to-equity of 96%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since VNTR is currently unprofitable, 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.

Next Steps:

Although VNTR’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 VNTR'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 VNTR has company-specific issues impacting its capital structure decisions. You should continue to research Venator Materials to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for VNTR’s future growth? Take a look at our free research report of analyst consensus for VNTR’s outlook.
  2. Valuation: What is VNTR 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 VNTR is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.