Just Water International Limited (NZSE:JWI) is a small-cap stock with a market capitalization of NZ$38.67M. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into JWI here.
How does JWI’s operating cash flow stack up against its debt?
Over the past year, JWI has ramped up its debt from NZ$693.00K to NZ$902.00K – this includes both the current and long-term debt. With this growth in debt, JWI’s cash and short-term investments stands at below NZ$10K, which is concerning. But on the other hand, JWI has generated cash from operations of NZ$2.67M in the last twelve months, resulting in an operating cash to total debt ratio of 295.90%, signalling that debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JWI’s case, it is able to generate 2.96x cash from its debt capital.
Can JWI pay its short-term liabilities?
At the current liabilities level of NZ$3.33M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of NZ$2.13M, leading to a 0.64x current account ratio. which is under the appropriate industry ratio of 3x.
Is JWI’s debt level acceptable?
JWI’s level of debt is appropriate relative to its total equity, at 15.89%. JWI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether JWI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JWI’s, case, the ratio of 40.04x 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.
Next Steps:
JWI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how JWI has been performing in the past. I recommend you continue to research Just Water International to get a more holistic view of the stock by looking at: