Yahoo Finance What You Must Know About Virtus Health Limited’s (ASX:VRT) Financial Strength
While small-cap stocks, such as Virtus Health Limited (ASX:VRT) with its market cap of AU$466.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into VRT here.
How much cash does VRT generate through its operations?
Over the past year, VRT has ramped up its debt from AU$154.5m to AU$184.5m , which comprises of short- and long-term debt. With this increase in debt, VRT currently has AU$21.7m remaining in cash and short-term investments , ready to deploy into the business. Moreover, VRT has generated AU$55.0m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 29.8%, indicating that VRT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VRT’s case, it is able to generate 0.3x cash from its debt capital.
Can VRT pay its short-term liabilities?
At the current liabilities level of AU$48.6m liabilities, the company has not been able to meet these commitments with a current assets level of AU$38.0m, leading to a 0.78x current account ratio. which is under the appropriate industry ratio of 3x.
Can VRT service its debt comfortably?
With a debt-to-equity ratio of 65.1%, VRT 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 test if VRT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VRT, the ratio of 6.44x 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:
VRT’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. Though 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 VRT has been performing in the past. You should continue to research Virtus Health to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for VRT’s future growth? Take a look at our free research report of analyst consensus for VRT’s outlook.
Valuation: What is VRT 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 VRT 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.
