Vasa Retail and Overseas Limited (NSE:VASA) is a small-cap stock with a market capitalization of ₹179.8m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into VASA here.
Does VASA produce enough cash relative to debt?
Over the past year, VASA has ramped up its debt from ₹62.8m to ₹98.8m , which comprises of short- and long-term debt. With this rise in debt, VASA’s cash and short-term investments stands at ₹11.9m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of VASA’s operating efficiency ratios such as ROA here.
Does VASA’s liquid assets cover its short-term commitments?
With current liabilities at ₹199.9m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Usually, for Retail Distributors companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is VASA’s debt level acceptable?
With debt reaching 98.6% of equity, VASA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 VASA’s case, the ratio of 2.01x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as VASA’s low interest coverage already puts the company at higher risk of default.