Is Watchstone Group Plc (LON:WTG) A Financially Sound Company?

Watchstone Group Plc (LON:WTG) is a small-cap stock with a market capitalization of UK£47.76m. 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? Companies operating in the IT industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company's financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WTG here.

How much cash does WTG generate through its operations?

WTG has shrunken its total debt levels in the last twelve months, from UK£6.40m to UK£6.00m , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£62.81m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of WTG’s operating efficiency ratios such as ROA here.

Can WTG meet its short-term obligations with the cash in hand?

With current liabilities at UK£27.79m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.56x. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Is WTG’s debt level acceptable?

With a debt-to-equity ratio of 9.08%, WTG's debt level is relatively low. This range is considered safe as WTG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for WTG, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

Although WTG’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure WTG has company-specific issues impacting its capital structure decisions. You should continue to research Watchstone Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for WTG’s future growth? Take a look at our free research report of analyst consensus for WTG’s outlook.
2. Historical Performance: What has WTG'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.