While small-cap stocks, such as Villars Holding SA. (SWX:VILN) with its market cap of CHF101.27M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into VILN here.
Does VILN generate enough cash through operations?
VILN’s debt level has been constant at around CHF11.93M over the previous year – this includes both the current and long-term debt. At this current level of debt, VILN currently has CHF41.93M remaining in cash and short-term investments for investing into the business. Additionally, VILN has generated CHF3.99M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 33.44%, indicating that VILN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VILN’s case, it is able to generate 0.33x cash from its debt capital.
Does VILN’s liquid assets cover its short-term commitments?
At the current liabilities level of CHF8.01M liabilities, the company has been able to meet these obligations given the level of current assets of CHF49.02M, with a current ratio of 6.12x. However, a ratio greater than 3x may be considered as too high, as VILN could be holding too much capital in a low-return investment environment.
Is VILN’s debt level acceptable?
With a debt-to-equity ratio of 13.30%, VILN’s debt level may be seen as prudent. This range is considered safe as VILN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if VILN’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 VILN, the ratio of 19.62x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as VILN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
VILN’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how VILN has been performing in the past. I suggest you continue to research Villars Holding to get a more holistic view of the stock by looking at: