Yahoo Finance 5N Plus Inc (TSE:VNP): Time For A Financial Health Check
While small-cap stocks, such as 5N Plus Inc (TSE:VNP) with its market cap of CA$292.35m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into VNP here.
Does VNP produce enough cash relative to debt?
VNP has built up its total debt levels in the last twelve months, from CA$43.48m to CA$0 – this includes both the current and long-term debt. With this growth in debt, VNP currently has CA$34.02m remaining in cash and short-term investments , ready to deploy into the business. Moreover, VNP has generated CA$13.11m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 26.73%, signalling that VNP’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VNP’s case, it is able to generate 0.27x cash from its debt capital.
Can VNP meet its short-term obligations with the cash in hand?
Looking at VNP’s most recent CA$68.65m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$165.23m, with a current ratio of 2.41x. For Chemicals 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 VNP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 44.07%, VNP can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether VNP 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 VNP’s, case, the ratio of 2.92x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although VNP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for VNP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research 5N Plus to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for VNP’s future growth? Take a look at our free research report of analyst consensus for VNP’s outlook.
Valuation: What is VNP 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 VNP is currently mispriced by the market.
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.
