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While small-cap stocks, such as Volt Information Sciences, Inc. (NYSEMKT:VISI) with its market cap of US$96m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that VISI is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into VISI here.
Does VISI Produce Much Cash Relative To Its Debt?
Over the past year, VISI has ramped up its debt from US$49m to US$54m – this includes long-term debt. With this increase in debt, VISI currently has US$43m remaining in cash and short-term investments to keep the business going. Additionally, VISI has produced US$3.5m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 6.4%, signalling that VISI’s operating cash is less than its debt.
Can VISI meet its short-term obligations with the cash in hand?
Looking at VISI’s US$98m in current 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 1.99x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is VISI’s debt level acceptable?
With total debt exceeding equity, VISI is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since VISI is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although VISI’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. This is only a rough assessment of financial health, and I'm sure VISI has company-specific issues impacting its capital structure decisions. You should continue to research Volt Information Sciences to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VISI’s future growth? Take a look at our free research report of analyst consensus for VISI’s outlook.
- Valuation: What is VISI 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 VISI 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.