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While small-cap stocks, such as Wright Medical Group N.V. (NASDAQ:WMGI) with its market cap of US$3.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since WMGI is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into WMGI here.
WMGI’s Debt (And Cash Flows)
WMGI's debt levels surged from US$911m to US$1.2b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$162m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of WMGI’s operating efficiency ratios such as ROA here.
Does WMGI’s liquid assets cover its short-term commitments?
With current liabilities at US$889m, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$810m, leading to a current ratio of 0.91x. The current ratio is the number you get when you divide current assets by current liabilities.
Can WMGI service its debt comfortably?
Since total debt levels exceed equity, WMGI is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since WMGI is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although WMGI’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure WMGI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Wright Medical Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WMGI’s future growth? Take a look at our free research report of analyst consensus for WMGI’s outlook.
- Valuation: What is WMGI 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 WMGI 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 firstname.lastname@example.org. 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.