While small-cap stocks, such as Wynnstay Properties Plc (LON:WSP) with its market cap of UK£15m, 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 crucial, as mismanagement of capital can lead to 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into WSP here.
How does WSP’s operating cash flow stack up against its debt?
WSP’s debt levels surged from UK£10m to UK£14m over the last 12 months , which includes long-term debt. With this growth in debt, WSP currently has UK£871k remaining in cash and short-term investments for investing into the business. Moreover, WSP has generated UK£1.1m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 8.0%, meaning that WSP’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WSP’s case, it is able to generate 0.08x cash from its debt capital.
Can WSP meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£1.5m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is WSP’s debt level acceptable?
WSP is a relatively highly levered company with a debt-to-equity of 65%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 WSP’s case, the ratio of 4.29x 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:
WSP’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. Since there is also no concerns around WSP’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WSP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Wynnstay Properties to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WSP’s future growth? Take a look at our free research report of analyst consensus for WSP’s outlook.
- Historical Performance: What has WSP’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.
- 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 editorial-team@simplywallst.com.