Does WPCS International Incorporated’s (WPCS) Debt Level Pose A Serious Problem?
While small-cap stocks, such as WPCS International Incorporated (NASDAQ:WPCS) with its market cap of USD $5.39M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. 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 WPCS
Does WPCS generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. 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. WPCS’s recent operating cash flow was -5.43 times its debt within the past year. This means what WPCS 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 WPCS’s operations at this point in time.
Can WPCS pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, WPCS may need to liquidate its short-term assets to pay these immediate obligations. We test for WPCS’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that WPCS does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does WPCS 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. WPCS’s debt-to-equity ratio stands at 6.25%, which means debt is low and does not pose any significant threat to the company’s operations.
Next Steps:
Are you a shareholder? WPCS’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest keeping abreast of market expectations for WPCS’s future growth on our free analysis platform.
Are you a potential investor? WPCS’s low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also analyse WPCS’s track record. As a following step, you should take a look at WPCS’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.
