What does Wayside Technology Group Inc’s (NASDAQ:WSTG) Balance Sheet Tell Us About Its Future?
The direct benefit for Wayside Technology Group Inc (NASDAQ:WSTG), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is WSTG will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess WSTG’s financial health.
See our latest analysis for Wayside Technology Group
Is WSTG right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. WSTG’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. WSTG’s revenue growth over the past year is an impressively high double-digit 97%. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can WSTG pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Wayside Technology Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$63m, it seems that the business has been able to meet these commitments with a current assets level of US$96m, leading to a 1.54x current account ratio. Generally, for Electronic companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Having no debt on the books means WSTG has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around WSTG’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for WSTG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Wayside Technology Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WSTG’s future growth? Take a look at our free research report of analyst consensus for WSTG’s outlook.
Valuation: What is WSTG 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 WSTG 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.
