While small-cap stocks, such as Wabash National Corporation (NYSE:WNC) with its market cap of US$727m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into WNC here.
How does WNC’s operating cash flow stack up against its debt?
WNC has shrunken its total debt levels in the last twelve months, from US$552m to US$506m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$104m for investing into the business. Moreover, WNC has generated US$140m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 28%, meaning that WNC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WNC’s case, it is able to generate 0.28x cash from its debt capital.
Can WNC pay its short-term liabilities?
At the current liabilities level of US$308m, it appears that the company has been able to meet these commitments with a current assets level of US$597m, leading to a 1.93x current account ratio. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can WNC service its debt comfortably?
With total debt exceeding equities, WNC is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In WNC’s case, the ratio of 4.71x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WNC ample headroom to grow its debt facilities.
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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how WNC has been performing in the past. You should continue to research Wabash National to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
- 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 past 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. For errors that warrant correction please contact the editor at email@example.com.