Investors are always looking for growth in small-cap stocks like China Jishan Holdings Limited (SGX:J18), with a market cap of S$36.18M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into J18 here.

Does J18 generate an acceptable amount of cash through operations?

J18’s debt levels have fallen from CN¥379.97M to CN¥343.79M over the last 12 months made up of predominantly near term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥40.70M , ready to deploy into the business. On top of this, J18 has generated cash from operations of CN¥19.06M in the last twelve months, resulting in an operating cash to total debt ratio of 5.55%, signalling that J18’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In J18’s case, it is able to generate 0.055x cash from its debt capital.

Does J18’s liquid assets cover its short-term commitments?

Looking at J18’s most recent CN¥542.55M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥560.18M, with a current ratio of 1.03x. Usually, for Luxury companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does J18 face the risk of succumbing to its debt-load?

With total debt exceeding equities, J18 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. We can test if J18’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For J18, the ratio of 3.86x 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:

J18’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 J18’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Jishan Holdings to get a more holistic view of the stock by looking at: