Investors are always looking for growth in small-cap stocks like Jaiprakash Associates Limited (NSEI:JPASSOCIAT), with a market cap of ₹50.84B. However, an important fact which most ignore is: how financially healthy is the business? Since JPASSOCIAT is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into JPASSOCIAT here.

Does JPASSOCIAT generate enough cash through operations?

Over the past year, JPASSOCIAT has reduced its debt from ₹662.46B to ₹390.63B , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹4.27B for investing into the business. On top of this, JPASSOCIAT has generated ₹57.93B in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14.83%, signalling that JPASSOCIAT’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In JPASSOCIAT’s case, it is able to generate 0.15x cash from its debt capital.

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

Looking at JPASSOCIAT’s most recent ₹286.84B liabilities, the company has been able to meet these commitments with a current assets level of ₹323.38B, leading to a 1.13x current account ratio. Generally, for Industrials 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.

Can JPASSOCIAT service its debt comfortably?

JPASSOCIAT is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since JPASSOCIAT is currently unprofitable, 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:

At its current level of cash flow coverage, JPASSOCIAT has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for JPASSOCIAT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Jaiprakash Associates to get a more holistic view of the stock by looking at: