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Investors are always looking for growth in small-cap stocks like Vista Group International Limited (NZSE:VGL), with a market cap of NZ$479.47M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into VGL here.
How does VGL’s operating cash flow stack up against its debt?
VGL’s debt levels surged from NZ$4.85M to NZ$11.32M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$20.95M , ready to deploy into the business. On top of this, VGL has produced NZ$11.05M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 97.54%, signalling that VGL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VGL’s case, it is able to generate 0.98x cash from its debt capital.
Does VGL’s liquid assets cover its short-term commitments?
With current liabilities at NZ$41.20M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. Generally, for Software companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does VGL face the risk of succumbing to its debt-load?
With debt at 7.65% of equity, VGL may be thought of as having low leverage. VGL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether VGL 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 VGL’s, case, the ratio of 62.39x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving VGL ample headroom to grow its debt facilities.
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VGL’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure VGL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Vista Group International to get a better picture of the stock by looking at: