Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as WD-40 Company (NASDAQ:WDFC), with a market cap of US$2.5b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine WDFC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WDFC here.
How does WDFC’s operating cash flow stack up against its debt?
Over the past year, WDFC has reduced its debt from US$164m to US$79m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$32m for investing into the business. Moreover, WDFC has produced US$61m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 77%, meaning that WDFC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WDFC’s case, it is able to generate 0.77x cash from its debt capital.
Can WDFC pay its short-term liabilities?
With current liabilities at US$67m, it appears that the company has been able to meet these commitments with a current assets level of US$146m, leading to a 2.19x current account ratio. For Household Products companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can WDFC service its debt comfortably?
With debt reaching 52% of equity, WDFC may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether WDFC 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 WDFC’s, case, the ratio of 20.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WDFC ample headroom to grow its debt facilities.
Although WDFC’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. Since there is also no concerns around WDFC’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WDFC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research WD-40 to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WDFC’s future growth? Take a look at our free research report of analyst consensus for WDFC’s outlook.
- Valuation: What is WDFC 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 WDFC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.