While small-cap stocks, such as WashTec AG ( FRA:WSU ) with its market cap of €887m, 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into WSU here .
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WSU’s Debt (And Cash Flows)
Over the past year, WSU has ramped up its debt from €17m to €51m . With this growth in debt, WSU currently has €12m remaining in cash and short-term investments to keep the business going. Moreover, WSU has generated cash from operations of €32m in the last twelve months, resulting in an operating cash to total debt ratio of 64%, signalling that WSU’s debt is appropriately covered by operating cash.
Can WSU meet its short-term obligations with the cash in hand?
Looking at WSU’s €131m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €139m, leading to a 1.06x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does WSU face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 53%, WSU can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether WSU 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 WSU's, case, the ratio of 85.25x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as WSU’s high interest coverage is seen as responsible and safe practice.
Although WSU’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. Since there is also no concerns around WSU's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how WSU has been performing in the past. I recommend you continue to research WashTec to get a more holistic view of the small-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for WSU’s future growth? Take a look at our free research report of analyst consensus for WSU’s outlook.
- Valuation : What is WSU 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 WSU 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.