Is Waterco Limited’s (ASX:WAT) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Waterco Limited (ASX:WAT), with a market cap of AU$78m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into WAT here.

Does WAT produce enough cash relative to debt?

Over the past year, WAT has maintained its debt levels at around AU$21m which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at AU$4.2m , ready to deploy into the business. Additionally, WAT has produced cash from operations of AU$2.0m during the same period of time, resulting in an operating cash to total debt ratio of 9.6%, indicating that WAT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WAT’s case, it is able to generate 0.096x cash from its debt capital.

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

At the current liabilities level of AU$31m, it appears that the company has been able to meet these obligations given the level of current assets of AU$62m, with a current ratio of 2x. For Leisure companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ASX:WAT Historical Debt, February 28th 2019
ASX:WAT Historical Debt, February 28th 2019

Is WAT’s debt level acceptable?

With debt at 27% of equity, WAT may be thought of as appropriately levered. This range is considered safe as WAT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether WAT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In WAT’s, case, the ratio of 5.19x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

WAT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure WAT has company-specific issues impacting its capital structure decisions. You should continue to research Waterco to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WAT’s future growth? Take a look at our free research report of analyst consensus for WAT’s outlook.
  2. Historical Performance: What has WAT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  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 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.