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Vesuvius India Limited (NSE:VESUVIUS), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is VESUVIUS will have to follow strict debt obligations which will reduce its financial flexibility. While VESUVIUS has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess VESUVIUS’s financial health.
Check out our latest analysis for Vesuvius India
Is VESUVIUS growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. VESUVIUS’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A single-digit revenue growth of 0.5% for VESUVIUS is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can VESUVIUS pay its short-term liabilities?
Since Vesuvius India doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of ₹1.6b liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹6.8b, leading to a 4.25x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue VESUVIUS is leaving too much capital in low-earning investments.
Next Steps:
VESUVIUS is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around VESUVIUS’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure VESUVIUS has company-specific issues impacting its capital structure decisions. You should continue to research Vesuvius India to get a better picture of the stock by looking at: