AquaVenture Holdings Limited (NYSE:WAAS) is a small-cap stock with a market capitalization of US$394.14M. 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? Given that WAAS is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into WAAS here.
Does WAAS generate an acceptable amount of cash through operations?
Over the past year, WAAS has ramped up its debt from US$143.72M to US$174.26M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$118.09M , ready to deploy into the business. On top of this, WAAS has generated cash from operations of US$15.92M during the same period of time, resulting in an operating cash to total debt ratio of 9.14%, meaning that WAAS’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In WAAS’s case, it is able to generate 0.091x cash from its debt capital.
Does WAAS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$25.28M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.12x. However, a ratio greater than 3x may be considered as too high, as WAAS could be holding too much capital in a low-return investment environment.
Is WAAS’s debt level acceptable?
With a debt-to-equity ratio of 50.67%, WAAS can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since WAAS is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, WAAS has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for WAAS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AquaVenture Holdings to get a more holistic view of the stock by looking at: