Yahoo Finance What Investors Should Know About Wagners Holding Company Limited’s (ASX:WGN) Financial Strength
Wagners Holding Company Limited (ASX:WGN) is a small-cap stock with a market capitalization of AU$524m. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into WGN here.
How much cash does WGN generate through its operations?
Over the past year, WGN has reduced its debt from AU$163m to AU$84m – this includes long-term debt. With this debt repayment, WGN’s cash and short-term investments stands at AU$1.5m , ready to deploy into the business. On top of this, WGN has produced cash from operations of AU$21m during the same period of time, resulting in an operating cash to total debt ratio of 25%, meaning that WGN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WGN’s case, it is able to generate 0.25x cash from its debt capital.
Can WGN pay its short-term liabilities?
At the current liabilities level of AU$50m, it appears that the company has been able to meet these commitments with a current assets level of AU$62m, leading to a 1.25x current account ratio. Generally, for Basic Materials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is WGN’s debt level acceptable?
WGN is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether WGN 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 WGN’s, case, the ratio of 5.36x 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:
Although WGN’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. Since there is also no concerns around WGN’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure WGN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Wagners Holding to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for WGN’s future growth? Take a look at our free research report of analyst consensus for WGN’s outlook.
Valuation: What is WGN 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 WGN 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.
