Does White Cliff Minerals Limited’s (ASX:WCN) Debt Level Pose A Serious Problem?
White Cliff Minerals Limited (ASX:WCN) is a small-cap stock with a market capitalization of AUD A$14.10M. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for WCN
Does WCN generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of WCN, operating cash flow turned out to be -8.79x its debt level over the past twelve months. This means what WCN can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at WCN’s operations at this point in time.
Can WCN meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, WCN may need to liquidate its short-term assets to pay these immediate obligations. We test for WCN’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that WCN is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does WCN face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For WCN, the debt-to-equity ratio is 5.57%, which indicates that the company faces low risk associated with debt. While debt-to-equity ratio has several factors at play, an easier way to check whether WCN’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. WCN’s interest on debt is sufficiently covered by earnings as it sits at around 3378.05x. Debtors may be willing to loan the company more money, giving WCN ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? WCN’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be keeping abreast of market expectations for WCN’s future growth on our free analysis platform.
Are you a potential investor? WCN’s low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to further examine the company’s track record. I encourage you to continue your research by taking a look at WCN’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.
