Investors are always looking for growth in small-cap stocks like Advanced Drainage Systems, Inc. (NYSE:WMS), with a market cap of US$1.4b. 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’d encourage you to dig deeper yourself into WMS here.
Does WMS produce enough cash relative to debt?
WMS’s debt levels have fallen from US$468m to US$364m over the last 12 months , which includes long-term debt. With this debt repayment, WMS currently has US$18m remaining in cash and short-term investments , ready to deploy into the business. On top of this, WMS has generated cash from operations of US$167m over the same time period, leading to an operating cash to total debt ratio of 46%, meaning that WMS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WMS’s case, it is able to generate 0.46x cash from its debt capital.
Does WMS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$221m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.31x. Usually, for Building companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does WMS face the risk of succumbing to its debt-load?
WMS is a relatively highly levered company with a debt-to-equity of 53%. 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 WMS 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 WMS’s, case, the ratio of 12.63x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WMS ample headroom to grow its debt facilities.
Although WMS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how WMS has been performing in the past. I recommend you continue to research Advanced Drainage Systems to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WMS’s future growth? Take a look at our free research report of analyst consensus for WMS’s outlook.
- Valuation: What is WMS 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 WMS 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 firstname.lastname@example.org.