Investors are always looking for growth in small-cap stocks like Wagners Holding Company Limited (ASX:WGN), with a market cap of A$580.95M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into WGN here.
Does WGN generate enough cash through operations?
WGN’s cash and short-term investments stands at A$6.4M for investing into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of WGN’s operating efficiency ratios such as ROA here.
Can WGN pay its short-term liabilities?
At the current liabilities level of A$44.2M liabilities, it appears that the company has been able to meet these commitments with a current assets level of A$47.9M, leading to a 1.08x current account ratio. Generally, for basic materials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does WGN face the risk of succumbing to its debt-load?
WGN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether WGN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In WGN’s, case, the ratio of 3.6x 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:
Are you a shareholder? At its current level of cash flow coverage, WGN has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. I suggest keeping on top of market expectations for WGN’s future growth on our free analysis platform.