While small-cap stocks, such as JC International Group Limited (ASX:JCI) with its market cap of A$40.13M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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, this commentary is still very high-level, so I recommend you dig deeper yourself into JCI here.

How does JCI’s operating cash flow stack up against its debt?

Over the past year, JCI has ramped up its debt from A$2.7M to A$7.5M made up of predominantly near term debt. With this rise in debt, the current cash and short-term investment levels stands at A$1.5M for investing into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of JCI’s operating efficiency ratios such as ROA here.

Can JCI pay its short-term liabilities?

With current liabilities at A$30.7M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.76x. 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.

Is JCI’s level of debt at an acceptable level?

JCI’s level of debt is appropriate relative to its total equity, at 17.41%. JCI is not taking on too much debt commitment, 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 interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In JCI’s, case, the ratio of 23.26x suggests that interest is excessively 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:

Are you a shareholder? JCI’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I suggest keeping abreast of market expectations for JCI’s future growth on our free analysis platform.

Are you a potential investor? JCI’s low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to further examine JCI’s track record. I encourage you to continue your research by taking a look at JCI’s past performance analysis on our free platform to conclude on JCI’s financial health.

To help readers see pass 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.