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Is Vesuvius plc's (LON:VSVS) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Vesuvius plc (LON:VSVS), with a market cap of UK£1.6b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine VSVS’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into VSVS here.

See our latest analysis for Vesuvius

Does VSVS Produce Much Cash Relative To Its Debt?

Over the past year, VSVS has ramped up its debt from UK£436m to UK£485m , which accounts for long term debt. With this increase in debt, VSVS's cash and short-term investments stands at UK£237m , ready to be used for running the business. Additionally, VSVS has generated UK£142m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29%, indicating that VSVS’s operating cash is sufficient to cover its debt.

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

Looking at VSVS’s UK£394m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.35x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:VSVS Historical Debt, March 27th 2019

Does VSVS face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 42%, VSVS can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 VSVS's case, the ratio of 17.54x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although VSVS’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 VSVS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Vesuvius to get a better picture of the mid-cap by looking at:

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