Is Wellcom Group Limited’s (ASX:WLL) Balance Sheet A Threat To Its Future?
Wellcom Group Limited (ASX:WLL) is a small-cap stock with a market capitalization of AU$192m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WLL here.
Does WLL produce enough cash relative to debt?
WLL has built up its total debt levels in the last twelve months, from AU$139k to AU$10m – this includes long-term debt. With this increase in debt, WLL’s cash and short-term investments stands at AU$8.0m , ready to deploy into the business. Moreover, WLL has produced cash from operations of AU$15m over the same time period, resulting in an operating cash to total debt ratio of 148%, indicating that WLL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WLL’s case, it is able to generate 1.48x cash from its debt capital.
Can WLL pay its short-term liabilities?
At the current liabilities level of AU$22m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.71x. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WLL’s debt level acceptable?
With a debt-to-equity ratio of 17%, WLL’s debt level may be seen as prudent. WLL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if WLL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For WLL, the ratio of 65.94x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as WLL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
WLL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how WLL has been performing in the past. You should continue to research Wellcom Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WLL’s future growth? Take a look at our free research report of analyst consensus for WLL’s outlook.
Valuation: What is WLL 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 WLL 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.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
