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While small-cap stocks, such as Coffee Holding Co Inc (NASDAQ:JVA) with its market cap of US$31.25m, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into JVA here.
How much cash does JVA generate through its operations?
JVA’s debt levels surged from US$6.96m to US$8.41m over the last 12 months , which is mainly comprised of near term debt. With this growth in debt, the current cash and short-term investment levels stands at US$2.33m for investing into the business. Additionally, JVA has produced US$1.48m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 17.56%, meaning that JVA’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JVA’s case, it is able to generate 0.18x cash from its debt capital.
Does JVA’s liquid assets cover its short-term commitments?
With current liabilities at US$13.05m, it seems that the business has been able to meet these commitments with a current assets level of US$33.66m, leading to a 2.58x current account ratio. For Food companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can JVA service its debt comfortably?
With a debt-to-equity ratio of 46.94%, JVA can be considered as an above-average leveraged company. 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 JVA’s case, the ratio of 7.01x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as JVA’s high interest coverage is seen as responsible and safe practice.
JVA’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure JVA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Coffee Holding to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JVA’s future growth? Take a look at our free research report of analyst consensus for JVA’s outlook.
Valuation: What is JVA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether JVA is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.