Are Vocus Group Limited’s (ASX:VOC) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Vocus Group Limited (ASX:VOC), with a market cap of AU$1.44B. However, an important fact which most ignore is: how financially healthy is the business? Telecom businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into VOC here.
Does VOC generate an acceptable amount of cash through operations?
Over the past year, VOC has ramped up its debt from AU$896.77M to AU$1.08B , which is made up of current and long term debt. With this increase in debt, VOC currently has AU$50.19M remaining in cash and short-term investments , ready to deploy into the business. On top of this, VOC has generated AU$131.42M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 12.13%, meaning that VOC’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In VOC’s case, it is able to generate 0.12x cash from its debt capital.
Can VOC pay its short-term liabilities?
Looking at VOC’s most recent AU$396.75M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of AU$327.49M, with a current ratio of 0.83x below the prudent level of 3x.
Can VOC service its debt comfortably?
VOC is a relatively highly levered company with a debt-to-equity of 47.39%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since VOC is presently loss-making, 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.
Next Steps:
At its current level of cash flow coverage, VOC has room for improvement to better cushion for events which may require debt repayment. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure VOC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Vocus Group to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for VOC’s future growth? Take a look at our free research report of analyst consensus for VOC’s outlook.
2. Valuation: What is VOC 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 VOC 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.
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.
