Veritas Investments Limited (NZSE:VIL) is a small-cap stock with a market capitalization of NZ$1.73M. 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, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into VIL here.

Does VIL generate an acceptable amount of cash through operations?

VIL’s debt levels have fallen from NZ$33.31M to NZ$28.47M over the last 12 months , which is made up of current and long term debt. With this debt payback, VIL currently has NZ$598.49K remaining in cash and short-term investments , ready to deploy into the business. Moreover, VIL has produced cash from operations of NZ$4.11M in the last twelve months, leading to an operating cash to total debt ratio of 14.43%, signalling that VIL’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 VIL’s case, it is able to generate 0.14x cash from its debt capital.

Does VIL’s liquid assets cover its short-term commitments?

Looking at VIL’s most recent NZ$31.46M liabilities, the company is not able to meet these obligations given the level of current assets of NZ$4.32M, with a current ratio of 0.14x below the prudent level of 3x.

Is VIL’s debt level acceptable?

Since total debt levels have outpaced equities, VIL is a highly 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 check to see whether VIL 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 VIL’s, case, the ratio of 4.61x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving VIL ample headroom to grow its debt facilities.

Next Steps:

VIL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how VIL has been performing in the past. You should continue to research Veritas Investments to get a more holistic view of the stock by looking at:

• 1. Valuation: What is VIL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether VIL is currently mispriced by the market.

• 2. Historical Performance: What has VIL’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.