While small-cap stocks, such as VSE Corporation (NASDAQ:VSEC) with its market cap of US$357m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into VSEC here.
Does VSEC produce enough cash relative to debt?
VSEC has shrunken its total debt levels in the last twelve months, from US$221m to US$201m – this includes both the current and long-term debt. With this reduction in debt, VSEC currently has US$1m remaining in cash and short-term investments for investing into the business. Moreover, VSEC has produced US$28m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 14%, indicating that VSEC’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VSEC’s case, it is able to generate 0.14x cash from its debt capital.
Does VSEC’s liquid assets cover its short-term commitments?
With current liabilities at US$101m, it seems that the business has been able to meet these obligations given the level of current assets of US$271m, with a current ratio of 2.7x. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can VSEC service its debt comfortably?
VSEC is a relatively highly levered company with a debt-to-equity of 65%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In VSEC’s case, the ratio of 5.76x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
At its current level of cash flow coverage, VSEC has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how VSEC has been performing in the past. I recommend you continue to research VSE to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VSEC’s future growth? Take a look at our free research report of analyst consensus for VSEC’s outlook.
- Valuation: What is VSEC 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 VSEC 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.
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 email@example.com.