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Investors are always looking for growth in small-cap stocks like Village Roadshow Limited (ASX:VRL), with a market cap of AU$463.2m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into VRL here.
Does VRL produce enough cash relative to debt?
VRL has shrunken its total debt levels in the last twelve months, from AU$627.8m to AU$504.9m , which is made up of current and long term debt. With this debt payback, VRL’s cash and short-term investments stands at AU$63.4m , ready to deploy into the business. On top of this, VRL has produced cash from operations of AU$21.4m in the last twelve months, resulting in an operating cash to total debt ratio of 4.2%, meaning that VRL’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VRL’s case, it is able to generate 0.042x cash from its debt capital.
Does VRL’s liquid assets cover its short-term commitments?
With current liabilities at AU$303.2m, the company has been able to meet these commitments with a current assets level of AU$308.3m, leading to a 1.02x current account ratio. Generally, for Media companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can VRL service its debt comfortably?
With total debt exceeding equities, VRL is considered a highly levered company. 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 VRL’s case, the ratio of less than 0.1x suggests is not appropriately covered lenders may be more reluctant to lend out more funding as VRL’s low interest coverage already puts the company at higher risk of default.
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At its current level of cash flow coverage, VRL has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure VRL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Village Roadshow to get a better picture of the stock by looking at: