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While small-cap stocks, such as VivoPower International PLC (NASDAQ:VVPR) with its market cap of US$17m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since VVPR is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into VVPR here.
How much cash does VVPR generate through its operations?
VVPR’s debt levels surged from US$20m to US$22m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, VVPR currently has US$2m remaining in cash and short-term investments , ready to deploy into the business. On top of this, VVPR has generated cash from operations of US$9m during the same period of time, leading to an operating cash to total debt ratio of 40%, signalling that VVPR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In VVPR’s case, it is able to generate 0.4x cash from its debt capital.
Can VVPR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$21m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$21m, leading to a 1.03x current account ratio. Generally, for Renewable Energy companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can VVPR service its debt comfortably?
VVPR is a relatively highly levered company with a debt-to-equity of 60%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since VVPR is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
VVPR’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. Since there is also no concerns around VVPR’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 VVPR has company-specific issues impacting its capital structure decisions. I recommend you continue to research VivoPower International to get a better picture of the small-cap by looking at:
Historical Performance: What has VVPR’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.
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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.