JC International Group Limited (ASX:JCI) is a small-cap stock with a market capitalization of AU$39.51M. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into JCI here.
Does JCI generate enough cash through operations?
JCI’s debt levels have fallen from AU$7.48M to AU$5.90M over the last 12 months made up of predominantly near term debt. With this debt repayment, JCI currently has AU$4.21M remaining in cash and short-term investments for investing into the business. Additionally, JCI has generated cash from operations of AU$2.35M over the same time period, leading to an operating cash to total debt ratio of 39.84%, signalling that JCI’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JCI’s case, it is able to generate 0.4x cash from its debt capital.
Can JCI meet its short-term obligations with the cash in hand?
Looking at JCI’s most recent AU$29.31M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$62.70M, with a current ratio of 2.14x. Generally, for Construction companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can JCI service its debt comfortably?
With debt at 12.96% of equity, JCI may be thought of as appropriately levered. This range is considered safe as JCI is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether JCI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JCI’s, case, the ratio of 24.34x suggests that interest is comfortably 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.