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Wajax Corporation (TSE:WJX) is a small-cap stock with a market capitalization of CA$317m. 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? Understanding the company's financial health becomes vital, 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into WJX here.
Does WJX Produce Much Cash Relative To Its Debt?
Over the past year, WJX has ramped up its debt from CA$170m to CA$370m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$5.8m to keep the business going. 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 examine some of WJX’s operating efficiency ratios such as ROA here.
Does WJX’s liquid assets cover its short-term commitments?
With current liabilities at CA$294m, it seems that the business has been able to meet these commitments with a current assets level of CA$679m, leading to a 2.31x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WJX’s debt level acceptable?
With debt reaching 93% of equity, WJX may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In WJX's case, the ratio of 5.56x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as WJX’s high interest coverage is seen as responsible and safe practice.
WJX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 WJX has been performing in the past. I suggest you continue to research Wajax to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WJX’s future growth? Take a look at our free research report of analyst consensus for WJX’s outlook.
- Valuation: What is WJX 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 WJX 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.
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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.