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While small-cap stocks, such as Johnson Service Group PLC (LON:JSG) with its market cap of UK£473m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into JSG here.
How much cash does JSG generate through its operations?
JSG has sustained its debt level by about UK£97m over the last 12 months comprising of short- and long-term debt. At this constant level of debt, JSG currently has UK£6m remaining in cash and short-term investments , ready to deploy into the business. Additionally, JSG has generated UK£81m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 84%, indicating that JSG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JSG’s case, it is able to generate 0.84x cash from its debt capital.
Does JSG’s liquid assets cover its short-term commitments?
With current liabilities at UK£91m, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£64m, with a current ratio of 0.71x.
Is JSG’s debt level acceptable?
With debt reaching 55% of equity, JSG may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In JSG’s case, the ratio of 11.25x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as JSG’s high interest coverage is seen as responsible and safe practice.
Next Steps:
JSG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure JSG has company-specific issues impacting its capital structure decisions. You should continue to research Johnson Service Group to get a more holistic view of the stock by looking at: