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You Might Like Village Roadshow Limited (ASX:VRL) But Do You Like Its Debt?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Village Roadshow Limited (ASX:VRL), with a market cap of AU$709m. However, an important fact which most ignore is: how financially healthy is the business? Given that VRL is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into VRL here.

Does VRL Produce Much Cash Relative To Its Debt?

VRL has shrunk its total debt levels in the last twelve months, from AU$482m to AU$420m , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at AU$99m to keep the business going. Additionally, VRL has produced AU$60m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14%, indicating that VRL’s current level of operating cash is not high enough to cover debt.

Can VRL meet its short-term obligations with the cash in hand?

With current liabilities at AU$345m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.97x. The current ratio is the number you get when you divide current assets by current liabilities.

ASX:VRL Historical Debt, May 3rd 2019

Is VRL’s debt level acceptable?

With debt reaching 95% of equity, VRL may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since VRL is currently unprofitable, 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.

Next Steps:

VRL’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how VRL has been performing in the past. You should continue to research Village Roadshow to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for VRL’s future growth? Take a look at our free research report of analyst consensus for VRL’s outlook.
  2. Valuation: What is VRL 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 VRL is currently mispriced by the market.
  3. 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 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.