U.S. Markets closed

Is Vince Holding Corp.'s (NYSE:VNCE) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Vince Holding Corp. (NYSE:VNCE), with a market cap of US$168m. However, an important fact which most ignore is: how financially healthy is the business? Since VNCE is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into VNCE here.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Does VNCE Produce Much Cash Relative To Its Debt?

VNCE's debt levels have fallen from US$49m to US$45m over the last 12 months , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$118k to keep the business going. On top of this, VNCE has produced US$3.6m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 7.9%, signalling that VNCE’s current level of operating cash is not high enough to cover debt.

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

With current liabilities at US$46m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.94x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:VNCE Historical Debt, May 20th 2019

Is VNCE’s debt level acceptable?

VNCE is a relatively highly levered company with a debt-to-equity of 61%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since VNCE is presently loss-making, 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 VNCE’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. I admit this is a fairly basic analysis for VNCE's financial health. Other important fundamentals need to be considered alongside. You should continue to research Vince Holding to get a better picture of the small-cap by looking at:

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