Yahoo Finance Vossloh AG (FRA:VOS): Time For A Financial Health Check
Vossloh AG (FRA:VOS) is a small-cap stock with a market capitalization of €645m. 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? 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into VOS here.
Does VOS produce enough cash relative to debt?
Over the past year, VOS has ramped up its debt from €281m to €313m , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €77m for investing into the business. On top of this, VOS has produced €88m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 28%, meaning that VOS’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VOS’s case, it is able to generate 0.28x cash from its debt capital.
Does VOS’s liquid assets cover its short-term commitments?
At the current liabilities level of €387m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. For Machinery 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.
Can VOS service its debt comfortably?
With debt reaching 60% of equity, VOS may be thought of as relatively highly levered. 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 VOS 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 VOS’s, case, the ratio of 5.33x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
VOS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 VOS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Vossloh to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for VOS’s future growth? Take a look at our free research report of analyst consensus for VOS’s outlook.
Valuation: What is VOS 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 VOS 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
