While small-cap stocks, such as Jackspeed Corporation Limited (SGX:J17) with its market cap of SGD57.24M, 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 vital, as mismanagement of capital can lead to 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 suggest you dig deeper yourself into J17 here.

How does J17’s operating cash flow stack up against its debt?

J17’s debt levels surged from SGD21.2M to SGD32.1M over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, the current cash and short-term investment levels stands at SGD12.7M , ready to deploy into the business. Moreover, J17 has generated cash from operations of SGD10.3M during the same period of time, leading to an operating cash to total debt ratio of 32.08%, meaning that J17’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In J17’s case, it is able to generate 0.32x cash from its debt capital.

Does J17’s liquid assets cover its short-term commitments?

With current liabilities at SGD40.7M, the company is not able to meet these obligations given the level of current assets of SGD40.0M, with a current ratio of 0.98x below the prudent level of 3x.

Does J17 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 75.85%, J17 can be considered as an above-average leveraged 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 J17’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 J17, the ratio of 10.45x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as J17’s high interest coverage is seen as responsible and safe practice.

Next Steps:

J17’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether short term obligations can be met in time, and increasing debt funding to meet these needs could prove difficult. This is only a rough assessment of financial health, and I’m sure J17 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Jackspeed to get a better picture of the stock by looking at: