WD-40 Company (NASDAQ:WDFC) is a small-cap stock with a market capitalization of US$2.3b. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into WDFC here.
Does WDFC Produce Much Cash Relative To Its Debt?
WDFC’s debt levels have fallen from US$167m to US$89m over the last 12 months – this includes long-term debt. With this debt payback, WDFC’s cash and short-term investments stands at US$32m to keep the business going. On top of this, WDFC has generated US$61m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 68%, meaning that WDFC’s operating cash is sufficient to cover its debt.
Does WDFC’s liquid assets cover its short-term commitments?
Looking at WDFC’s US$77m in current liabilities, the company 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.
Does WDFC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 57%, WDFC can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether WDFC 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 WDFC’s, case, the ratio of 22.01x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as WDFC’s high interest coverage is seen as responsible and safe practice.
WDFC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for WDFC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research WD-40 to get a more holistic view of the small-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.
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 email@example.com. 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.