While small-cap stocks, such as JK Cement Limited (NSEI:JKCEMENT) with its market cap of ₹77.81B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, 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. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into JKCEMENT here.
Does JKCEMENT generate enough cash through operations?
JKCEMENT’s debt level has been constant at around ₹33,516.9M over the previous year comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹4,962.3M for investing into the business. Moreover, JKCEMENT has generated cash from operations of ₹7,594.6M in the last twelve months, resulting in an operating cash to total debt ratio of 22.66%, meaning that JKCEMENT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JKCEMENT’s case, it is able to generate 0.23x cash from its debt capital.
Can JKCEMENT pay its short-term liabilities?
At the current liabilities level of ₹12,716.7M liabilities, the company has been able to meet these commitments with a current assets level of ₹14,804.1M, leading to a 1.16x current account ratio. Generally, for basic materials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is JKCEMENT’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, JKCEMENT is a highly leveraged company. 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 JKCEMENT’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 JKCEMENT, the ratio of 2.17x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Are you a shareholder? JKCEMENT’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that JKCEMENT’s financial situation may change. You should always be keeping on top of market expectations for JKCEMENT’s future growth on our free analysis platform.