While small-cap stocks, such as Vadivarhe Speciality Chemicals Limited (NSE:VSCL) with its market cap of ₹417m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into VSCL here.
VSCL’s Debt (And Cash Flows)
VSCL’s debt levels have fallen from ₹127m to ₹97m over the last 12 months , which also accounts for long term debt. With this debt payback, VSCL currently has ₹8.1m remaining in cash and short-term investments , ready to be used for running the business. Additionally, VSCL has produced cash from operations of ₹72m during the same period of time, leading to an operating cash to total debt ratio of 74%, indicating that VSCL’s current level of operating cash is high enough to cover debt.
Does VSCL’s liquid assets cover its short-term commitments?
Looking at VSCL’s ₹94m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.72x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does VSCL face the risk of succumbing to its debt-load?
With debt at 35% of equity, VSCL may be thought of as appropriately levered. This range is considered safe as VSCL is not taking on too much debt obligation, which may be constraining for future growth. We can test if VSCL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VSCL, the ratio of 4.43x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving VSCL ample headroom to grow its debt facilities.
Next Steps:
VSCL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for VSCL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Vadivarhe Speciality Chemicals to get a better picture of the stock by looking at: