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Judges Scientific plc (LON:JDG) is a small-cap stock with a market capitalization of UK£157.1m. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into JDG here.
Does JDG produce enough cash relative to debt?
JDG has built up its total debt levels in the last twelve months, from UK£16.5m to UK£18.3m , which comprises of short- and long-term debt. With this rise in debt, JDG’s cash and short-term investments stands at UK£10.7m for investing into the business. On top of this, JDG has produced UK£10.5m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 57.5%, meaning that JDG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JDG’s case, it is able to generate 0.58x cash from its debt capital.
Can JDG pay its short-term liabilities?
With current liabilities at UK£19.0m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does JDG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 74.1%, JDG 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 JDG’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 JDG, the ratio of 12.32x suggests that interest is comfortably 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.
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Although JDG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure JDG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Judges Scientific to get a more holistic view of the small-cap by looking at: