While small-cap stocks, such as Virco Mfg Corporation (NASDAQ:VIRC) with its market cap of US$67.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into VIRC here.
Does VIRC generate an acceptable amount of cash through operations?
Over the past year, VIRC has reduced its debt from US$6.76M to US$5.01M – this includes both the current and long-term debt. With this debt payback, VIRC currently has US$788.00K remaining in cash and short-term investments , ready to deploy into the business. Moreover, VIRC has produced cash from operations of US$5.86M over the same time period, leading to an operating cash to total debt ratio of 116.98%, meaning that VIRC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VIRC’s case, it is able to generate 1.17x cash from its debt capital.
Can VIRC pay its short-term liabilities?
With current liabilities at US$21.59M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.25x. For Commercial Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does VIRC face the risk of succumbing to its debt-load?
With debt at 22.25% of equity, VIRC may be thought of as appropriately levered. VIRC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether VIRC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VIRC’s, case, the ratio of 3.2x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VIRC’s high interest coverage is seen as responsible and safe practice.
VIRC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure VIRC has company-specific issues impacting its capital structure decisions. You should continue to research Virco Mfg to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for VIRC’s future growth? Take a look at our free research report of analyst consensus for VIRC’s outlook.
2. Historical Performance: What has VIRC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.