Investors are always looking for growth in small-cap stocks like WestStar Industrial Limited (ASX:WSI), with a market cap of A$8.50M. However, an important fact which most ignore is: how financially healthy is the business? Given that WSI is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into WSI here.
Does WSI generate enough cash through operations?
WSI has shrunken its total debt levels in the last twelve months, from A$1.4M to A$0.6M , which is mainly comprised of near term debt. With this debt payback, the current cash and short-term investment levels stands at A$1.6M for investing into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 WSI’s operating efficiency ratios such as ROA here.
Can WSI pay its short-term liabilities?
Looking at WSI’s most recent A$2.5M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. For metals and mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WSI’s level of debt at an acceptable level?
WSI is a relatively highly levered company with a debt-to-equity of 74.80%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since WSI is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, WSI has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I suggest researching market expectations for WSI’s future growth on our free analysis platform.
Are you a potential investor? Although near-term liquidity isn’t a concern, WSI’s large debt ratio on top of low cash coverage of debt may not build the strongest investment case. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of WSI’s track record. As a following step, you should take a look at WSI’s past performance analysis on our free platform to conclude on WSI’s financial health.
To help readers see pass 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.