JKX Oil & Gas plc (LSE:JKX) is a small-cap stock with a market capitalization of UK£35.01M. 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? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into JKX here.

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

JKX’s debt levels have fallen from US$34.35M to US$16.80M over the last 12 months , which comprises of short- and long-term debt. With this debt payback, JKX currently has US$14.07M remaining in cash and short-term investments for investing into the business. On top of this, JKX has produced cash from operations of US$14.64M in the last twelve months, resulting in an operating cash to total debt ratio of 87.14%, signalling that JKX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In JKX’s case, it is able to generate 0.87x cash from its debt capital.

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

At the current liabilities level of US$68.33M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.34x, which is below the prudent industry ratio of 3x.

Is JKX’s debt level acceptable?

With debt at 10.69% of equity, JKX may be thought of as appropriately levered. This range is considered safe as JKX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with JKX, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

JKX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for JKX, especially when liquidity may also be an issue. Keep in mind I haven’t considered other factors such as how JKX has been performing in the past. You should continue to research JKX Oil & Gas to get a better picture of the stock by looking at: