While small-cap stocks, such as Coffee Holding Co Inc (NASDAQ:JVA) with its market cap of $24.61M, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into JVA here.
How does JVA’s operating cash flow stack up against its debt?
JVA’s debt levels surged from $5.6M to $7.0M over the last 12 months made up of predominantly near term debt. With this rise in debt, JVA’s cash and short-term investments stands at $3.4M , ready to deploy into the business. Moreover, JVA has produced $1.6M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.23x, signalling that JVA’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 JVA’s case, it is able to generate 0.23x cash from its debt capital.
Can JVA pay its short-term liabilities?
At the current liabilities level of $11.0M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $32.7M, with a current ratio of 2.97x. For food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is JVA’s level of debt at an acceptable level?
With debt at 29.08% of equity, JVA may be thought of as appropriately levered. This range is considered safe as JVA is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether JVA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In JVA’s, case, the ratio of 5.8x 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.
Are you a shareholder? JVA’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, its financial position may be different. You should always be keeping abreast of market expectations for JVA’s future growth on our free analysis platform.
Are you a potential investor? Although JVA’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to further analyse JVA’s track record. As a following step, you should take a look at JVA’s past performance analysis on our free platform to conclude on JVA’s financial health.
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.