While small-cap stocks, such as WD-40 Company (NASDAQ:WDFC) with its market cap of US$2.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into WDFC here.
WDFC’s Debt (And Cash Flows)
WDFC has shrunk its total debt levels in the last twelve months, from US$167m to US$89m – this includes long-term debt. With this debt payback, WDFC currently has US$32m remaining in cash and short-term investments to keep the business going. Additionally, WDFC has produced US$61m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 68%, indicating that WDFC’s operating cash is sufficient to cover its debt.
Does WDFC’s liquid assets cover its short-term commitments?
With current liabilities at US$77m, it appears that the company has been able to meet these obligations given the level of current assets of US$159m, with a current ratio of 2.07x. The current ratio is calculated by dividing current assets by current liabilities. For Household Products companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does WDFC face the risk of succumbing to its debt-load?
With debt reaching 57% of equity, WDFC may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 22.01x 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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for WDFC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research WD-40 to get a better picture of the small-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.
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