Daily Journal Corporation (NASDAQ:DJCO) is a small-cap stock with a market capitalization of US$325m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about 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, this commentary is still very high-level, so I recommend you dig deeper yourself into DJCO here.
How does DJCO’s operating cash flow stack up against its debt?
DJCO’s debt level has been constant at around US$31m over the previous year which accounts for long term debt. At this stable level of debt, DJCO currently has US$212m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of DJCO’s operating efficiency ratios such as ROA here.
Can DJCO pay its short-term liabilities?
At the current liabilities level of US$25m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.8x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is DJCO’s debt level acceptable?
With a debt-to-equity ratio of 20%, DJCO’s debt level may be seen as prudent. This range is considered safe as DJCO is not taking on too much debt obligation, which may be constraining for future growth. We can test if DJCO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DJCO, the ratio of 3.18x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DJCO ample headroom to grow its debt facilities.
DJCO’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for DJCO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Daily Journal to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DJCO’s future growth? Take a look at our free research report of analyst consensus for DJCO’s outlook.
- Historical Performance: What has DJCO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 past 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.
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