Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as WD-40 Company (NASDAQ:WDFC), with a market capitalization of US$2.3b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at WDFC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WDFC here.
WDFC’s Debt (And Cash Flows)
Over the past year, WDFC has reduced its debt from US$167m to US$89m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$32m , ready to be used for running the business. Additionally, WDFC has generated US$61m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 68%, indicating that WDFC’s operating cash is sufficient to cover its debt.
Can WDFC pay its short-term liabilities?
Looking at WDFC’s US$77m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.07x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Household Products companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can WDFC service its debt comfortably?
With a debt-to-equity ratio of 57%, WDFC can be considered as an above-average leveraged company. This is not unusual for mid-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 WDFC’s case, the ratio of 22.01x suggests that interest is comfortably 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.
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. I suggest you continue to research WD-40 to get a more holistic view 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.
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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.