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Vicat SA (EPA:VCT) is a small-cap stock with a market capitalization of €2.0b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into VCT here.
VCT’s Debt (And Cash Flows)
VCT's debt level has been constant at around €1.0b over the previous year which accounts for long term debt. At this current level of debt, VCT's cash and short-term investments stands at €315m , ready to be used for running the business. Moreover, VCT has generated €333m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 32%, signalling that VCT’s operating cash is sufficient to cover its debt.
Can VCT meet its short-term obligations with the cash in hand?
At the current liabilities level of €783m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Basic Materials companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is VCT’s debt level acceptable?
With debt reaching 41% of equity, VCT may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if VCT’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 VCT, the ratio of 12.16x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving VCT ample headroom to grow its debt facilities.
VCT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for VCT's financial health. Other important fundamentals need to be considered alongside. You should continue to research Vicat to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VCT’s future growth? Take a look at our free research report of analyst consensus for VCT’s outlook.
- Valuation: What is VCT 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 VCT 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.
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 firstname.lastname@example.org. 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.