Investors are always looking for growth in small-cap stocks like Vertoz Advertising Limited (NSEI:VERTOZ), with a market cap of ₹775.66M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Internet industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into VERTOZ here.
Does VERTOZ generate enough cash through operations?
VERTOZ’s debt levels surged from ₹3.5M to ₹44.9M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹31.3M , ready to deploy into the business. Additionally, VERTOZ has produced cash from operations of ₹48.9M during the same period of time, leading to an operating cash to total debt ratio of 108.98%, meaning that VERTOZ’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VERTOZ’s case, it is able to generate 1.09x cash from its debt capital.
Can VERTOZ pay its short-term liabilities?
At the current liabilities level of ₹107.5M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of ₹105.7M, with a current ratio of 0.98x below the prudent level of 3x.
Does VERTOZ face the risk of succumbing to its debt-load?
VERTOZ is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether VERTOZ 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 VERTOZ’s, case, the ratio of 11.46x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as VERTOZ’s high interest coverage is seen as responsible and safe practice.
Next Steps:
VERTOZ’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. Though its lack of liquidity means the company may be pressed to meet its short-term obligations, and increasing debt funding to meet these needs could prove difficult. Keep in mind I haven’t considered other factors such as how VERTOZ has been performing in the past. You should continue to research Vertoz Advertising to get a more holistic view of the stock by looking at: