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Jadason Enterprises Ltd (SGX:J03) is a small-cap stock with a market capitalization of S$22m. 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? Given that J03 is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into J03 here.
J03’s Debt (And Cash Flows)
J03's debt levels surged from S$2.6m to S$20m over the last 12 months , which accounts for long term debt. With this increase in debt, J03 currently has S$8.8m remaining in cash and short-term investments to keep the business going. On top of this, J03 has generated S$4.2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 21%, indicating that J03’s operating cash is sufficient to cover its debt.
Does J03’s liquid assets cover its short-term commitments?
With current liabilities at S$17m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.68x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electronic companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can J03 service its debt comfortably?
J03 is a relatively highly levered company with a debt-to-equity of 41%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since J03 is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although J03’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. Since there is also no concerns around J03's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for J03's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Jadason Enterprises to get a more holistic view of the small-cap by looking at: