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Wabash National Corporation (NYSE:WNC): Time For A Financial Health Check

Simply Wall St

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Wabash National Corporation (NYSE:WNC) is a small-cap stock with a market capitalization of US$898m. 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, since poor capital management may bring about 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’d encourage you to dig deeper yourself into WNC here.

WNC’s Debt (And Cash Flows)

Over the past year, WNC has reduced its debt from US$542m to US$509m , which includes long-term debt. With this reduction in debt, WNC's cash and short-term investments stands at US$152m to keep the business going. Additionally, WNC has generated US$158m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 31%, meaning that WNC’s operating cash is sufficient to cover its debt.

Does WNC’s liquid assets cover its short-term commitments?

Looking at WNC’s US$361m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$647m, leading to a 1.8x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:WNC Historical Debt, July 2nd 2019

Does WNC face the risk of succumbing to its debt-load?

WNC is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if WNC’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 WNC, the ratio of 4.77x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as WNC’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although WNC’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 WNC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WNC's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Wabash National to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WNC’s future growth? Take a look at our free research report of analyst consensus for WNC’s outlook.
  2. Valuation: What is WNC 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 WNC 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.

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 editorial-team@simplywallst.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.