What You Must Know About Water Intelligence plc’s (LON:WATR) Financial Strength
Water Intelligence plc (AIM:WATR) is a small-cap stock with a market capitalization of UK£24.27M. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WATR here.
Does WATR generate enough cash through operations?
WATR’s debt levels have fallen from US$2.05M to US$1.82M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, WATR currently has US$1.06M remaining in cash and short-term investments for investing into the business. Moreover, WATR has generated US$533.10K in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29.29%, indicating that WATR’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WATR’s case, it is able to generate 0.29x cash from its debt capital.
Does WATR’s liquid assets cover its short-term commitments?
Looking at WATR’s most recent US$2.01M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.59M, with a current ratio of 1.79x. Generally, for Commercial Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can WATR service its debt comfortably?
With a debt-to-equity ratio of 34.27%, WATR’s debt level may be seen as prudent. This range is considered safe as WATR is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if WATR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For WATR, the ratio of 4.94x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WATR ample headroom to grow its debt facilities.
Next Steps:
WATR’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how WATR has been performing in the past. You should continue to research Water Intelligence to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for WATR’s future growth? Take a look at our free research report of analyst consensus for WATR’s outlook.
2. Valuation: What is WATR 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 WATR is currently mispriced by the market.
3. 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.
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.
