While small-cap stocks, such as AquaVenture Holdings Limited (NYSE:WAAS) with its market cap of USD $405.53M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since WAAS is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into WAAS here.
Does WAAS generate an acceptable amount of cash through operations?
Over the past year, WAAS has maintained its debt levels at around $143.7M made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at $95.3M for investing into the business. Moreover, WAAS has generated cash from operations of $13.6M during the same period of time, resulting in an operating cash to total debt ratio of 0.09x, signalling that WAAS’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In WAAS’s case, it is able to generate 0.09x cash from its debt capital.
Does WAAS’s liquid assets cover its short-term commitments?
Looking at WAAS’s most recent $47.7M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $123.6M, leading to a 2.59x current account ratio. For water utilities 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.
Is WAAS’s level of debt at an acceptable level?
WAAS is a relatively highly levered company with a debt-to-equity of 49.02%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since WAAS is presently 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:
Are you a shareholder? WAAS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be keeping on top of market expectations for WAAS’s future growth on our free analysis platform.