While small-cap stocks, such as Vadivarhe Speciality Chemicals Limited (NSEI:VSCL) with its market cap of ₹974.68M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into VSCL here.
Does VSCL generate enough cash through operations?
Over the past year, VSCL has ramped up its debt from ₹106.50M to ₹127.36M – this includes both the current and long-term debt. With this rise in debt, VSCL currently has ₹1.08M remaining in cash and short-term investments for investing into the business. Additionally, VSCL has produced ₹63.82M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 50.11%, signalling that VSCL’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VSCL’s case, it is able to generate 0.5x cash from its debt capital.
Can VSCL meet its short-term obligations with the cash in hand?
Looking at VSCL’s most recent ₹153.86M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is VSCL’s debt level acceptable?
VSCL is a relatively highly levered company with a debt-to-equity of 54.27%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 13.39x suggests that interest is comfortably 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 means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around VSCL’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VSCL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Vadivarhe Speciality Chemicals to get a more holistic view of the small-cap by looking at: