Vascon Engineers Limited (NSE:VASCONEQ) is a small-cap stock with a market capitalization of ₹3.5b. 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? Evaluating financial health as part of your investment thesis 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. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into VASCONEQ here.
Does VASCONEQ produce enough cash relative to debt?
VASCONEQ’s debt level has been constant at around ₹2.8b over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹386m for investing into the business. Additionally, VASCONEQ has generated cash from operations of ₹100m during the same period of time, resulting in an operating cash to total debt ratio of 3.6%, meaning that VASCONEQ’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VASCONEQ’s case, it is able to generate 0.036x cash from its debt capital.
Can VASCONEQ pay its short-term liabilities?
Looking at VASCONEQ’s most recent ₹5.3b liabilities, the company has been able to meet these commitments with a current assets level of ₹9.4b, leading to a 1.77x current account ratio. Usually, for Construction companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does VASCONEQ face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 41%, VASCONEQ can be considered as an above-average leveraged company. 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 VASCONEQ’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 VASCONEQ, the ratio of 1.16x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
VASCONEQ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how VASCONEQ has been performing in the past. I recommend you continue to research Vascon Engineers to get a better picture of the stock by looking at: