How Financially Strong Is Wallenstam AB (publ) (STO:WALL B)?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Wallenstam AB (publ) (STO:WALL B), with a market cap of kr32b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into WALL B here.

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Does WALL B Produce Much Cash Relative To Its Debt?

WALL B has built up its total debt levels in the last twelve months, from kr20b to kr23b , which accounts for long term debt. With this growth in debt, WALL B currently has kr496m remaining in cash and short-term investments , ready to be used for running the business. Moreover, WALL B has produced kr483m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 2.1%, indicating that WALL B’s current level of operating cash is not high enough to cover debt.

Can WALL B meet its short-term obligations with the cash in hand?

With current liabilities at kr13b, it appears that the company may not have an easy time meeting these commitments with a current assets level of kr891m, leading to a current ratio of 0.067x. The current ratio is calculated by dividing current assets by current liabilities.

OM:WALL B Historical Debt, May 20th 2019

Does WALL B face the risk of succumbing to its debt-load?

WALL B is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether WALL B 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 WALL B's, case, the ratio of 3.06x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WALL B ample headroom to grow its debt facilities.

Next Steps:

Although WALL B’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, 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 WALL B has been performing in the past. You should continue to research Wallenstam to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WALL B’s future growth? Take a look at our free research report of analyst consensus for WALL B’s outlook.
  2. Historical Performance: What has WALL B's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. 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 editorial-team@simplywallst.com. 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.