WANdisco plc (AIM:WAND) is a small-cap stock with a market capitalization of GBP £240.87M. 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? Companies operating in the software industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into WAND here.
Does WAND generate an acceptable amount of cash through operations?
WAND has increased its debt level by about $0M over the last 12 months made up of current and long term debt. With this increase in debt, WAND’s cash and short-term investments stands at $8M for investing into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of WAND’s operating efficiency ratios such as ROA here.
Can WAND meet its short-term obligations with the cash in hand?
Looking at WAND’s most recent $9M 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 1.46x. Generally, for software companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is WAND’s level of debt at an acceptable level?
With total debt exceeding equities, WAND is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since WAND is presently loss-making, sustainability of its current state of operations becomes a concern. 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:
Are you a shareholder? WAND’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. Moving forward, its financial position may be different. I suggest keeping abreast of market expectations for WAND’s future growth on our free analysis platform.