Yahoo Finance Is William Lyon Homes’s (NYSE:WLH) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as William Lyon Homes (NYSE:WLH) with its market cap of US$635.7m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into WLH here.
Does WLH produce enough cash relative to debt?
WLH’s debt levels surged from US$1.14b to US$1.46b over the last 12 months , which is made up of current and long term debt. With this rise in debt, WLH’s cash and short-term investments stands at US$49.2m , ready to deploy into the business. On top of this, WLH has generated US$104.3m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 7.2%, meaning that WLH’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WLH’s case, it is able to generate 0.072x cash from its debt capital.
Can WLH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$503.8m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$2.65b, with a current ratio of 5.25x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue WLH could be holding too much capital in a low-return investment environment.
Does WLH face the risk of succumbing to its debt-load?
With total debt exceeding equities, WLH 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.
Next Steps:
At its current level of cash flow coverage, WLH has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure WLH has company-specific issues impacting its capital structure decisions. I recommend you continue to research William Lyon Homes to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WLH’s future growth? Take a look at our free research report of analyst consensus for WLH’s outlook.
Valuation: What is WLH 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 WLH 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.
