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Veracruz Properties SOCIMI, S.A. (BME:YVCP) is a small-cap stock with a market capitalization of €750k. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into YVCP here.
YVCP’s Debt (And Cash Flows)
YVCP's debt levels surged from €30m to €32m over the last 12 months , which includes long-term debt. With this rise in debt, YVCP's cash and short-term investments stands at €2.0m to keep the business going. On top of this, YVCP has produced cash from operations of €3.3m during the same period of time, resulting in an operating cash to total debt ratio of 10%, indicating that YVCP’s operating cash is less than its debt.
Does YVCP’s liquid assets cover its short-term commitments?
With current liabilities at €3.4m, the company may not have an easy time meeting these commitments with a current assets level of €2.8m, leading to a current ratio of 0.82x. The current ratio is the number you get when you divide current assets by current liabilities.
Is YVCP’s debt level acceptable?
With debt reaching 78% of equity, YVCP may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether YVCP 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 YVCP's, case, the ratio of 4.96x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as YVCP’s high interest coverage is seen as responsible and safe practice.
Next Steps:
YVCP’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure YVCP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Veracruz Properties SOCIMI to get a better picture of the stock by looking at: