While small-cap stocks, such as Wilmington plc (LON:WIL) with its market cap of UK£177m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into WIL here.
WIL’s Debt (And Cash Flows)
Over the past year, WIL has maintained its debt levels at around UK£56m – this includes long-term debt. At this constant level of debt, WIL's cash and short-term investments stands at UK£12m , ready to be used for running the business. Additionally, WIL has produced UK£16m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29%, indicating that WIL’s operating cash is sufficient to cover its debt.
Can WIL pay its short-term liabilities?
Looking at WIL’s UK£52m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.76x. The current ratio is calculated by dividing current assets by current liabilities.
Does WIL face the risk of succumbing to its debt-load?
WIL 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 WIL’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 WIL, the ratio of 8.95x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as WIL’s high interest coverage is seen as responsible and safe practice.
Although WIL’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how WIL has been performing in the past. I recommend you continue to research Wilmington to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WIL’s future growth? Take a look at our free research report of analyst consensus for WIL’s outlook.
- Valuation: What is WIL 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 WIL 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.