Wellington Drive Technologies Limited (NZSE:WDT) is a small-cap stock with a market capitalization of NZ$57m. 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. Why is it important? Since WDT is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into WDT here.
WDT’s Debt (And Cash Flows)
WDT has built up its total debt levels in the last twelve months, from NZ$2.6m to NZ$5.6m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$933k to keep the business going. Moreover, WDT has generated NZ$1.8m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 33%, indicating that WDT’s operating cash is sufficient to cover its debt.
Can WDT meet its short-term obligations with the cash in hand?
At the current liabilities level of NZ$25m, it appears that the company may not be able to easily meet these obligations given the level of current assets of NZ$24m, with a current ratio of 0.94x. The current ratio is the number you get when you divide current assets by current liabilities.
Can WDT service its debt comfortably?
WDT is a relatively highly levered company with a debt-to-equity of 89%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since WDT is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although WDT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how WDT has been performing in the past. You should continue to research Wellington Drive Technologies to get a more holistic view of the stock by looking at:
- Historical Performance: What has WDT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.