While small-cap stocks, such as Jash Engineering Limited (NSE:JASH) with its market cap of ₹1.25b, 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, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into JASH here.
How does JASH’s operating cash flow stack up against its debt?
Over the past year, JASH has ramped up its debt from ₹519.9m to ₹639.8m , which comprises of short- and long-term debt. With this growth in debt, JASH’s cash and short-term investments stands at ₹106.7m , ready to deploy into the business. Moving onto cash from operations, 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of JASH’s operating efficiency ratios such as ROA here.
Can JASH pay its short-term liabilities?
At the current liabilities level of ₹1.01b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can JASH service its debt comfortably?
With debt reaching 60.3% of equity, JASH may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if JASH’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 JASH, the ratio of 0.64x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as JASH’s low interest coverage already puts the company at higher risk of default.
Next Steps:
At its current level of cash flow coverage, JASH has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how JASH has been performing in the past. I recommend you continue to research Jash Engineering to get a more holistic view of the stock by looking at: