Vital Metals Limited (ASX:VML) is a small-cap stock with a market capitalization of AUD A$10.56M. 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? Given that VML is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into VML here.
Does VML generate an acceptable amount of cash through operations?
VML has shrunken its total debt levels in the last twelve months, from A$3.0M to A$1.3M , which comprises of short- and long-term debt. With this debt repayment, VML currently has A$2.7M remaining in cash and short-term investments for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of VML’s operating efficiency ratios such as ROA here.
Can VML meet its short-term obligations with the cash in hand?
Looking at VML’s most recent A$1.4M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.91x. For metals and mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does VML face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 18.15%, VML’s debt level may be seen as prudent. This range is considered safe as VML is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for VML, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? Although VML’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. You should always be researching market expectations for VML’s future growth on our free analysis platform.