Stocks with market capitalization between $2B and $10B, such as WD-40 Company (NASDAQ:WDFC) with a size of US$2.5b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine WDFC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into WDFC here.
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Does WDFC produce enough cash relative to debt?
WDFC’s debt levels have fallen from US$164m to US$79m over the last 12 months , which also accounts for long term debt. With this debt payback, WDFC currently has US$32m remaining in cash and short-term investments , ready to deploy into the business. Moreover, WDFC has produced US$61m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 77%, signalling that WDFC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WDFC’s case, it is able to generate 0.77x cash from its debt capital.
Can WDFC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$67m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.19x. Generally, for Household Products companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can WDFC service its debt comfortably?
WDFC is a relatively highly levered company with a debt-to-equity of 52%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 WDFC’s case, the ratio of 20.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WDFC ample headroom to grow its debt facilities.
Next Steps:
Although WDFC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 WDFC has been performing in the past. You should continue to research WD-40 to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WDFC’s future growth? Take a look at our free research report of analyst consensus for WDFC’s outlook.
- Valuation: What is WDFC 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 WDFC 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.
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.