j2 Global, Inc. (NASDAQ:JCOM) is a small-cap stock with a market capitalization of US$4.4b. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into JCOM here.
Does JCOM Produce Much Cash Relative To Its Debt?
JCOM has built up its total debt levels in the last twelve months, from US$1.0b to US$1.1b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$227m , ready to be used for running the business. Additionally, JCOM has produced US$414m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 38%, signalling that JCOM’s operating cash is sufficient to cover its debt.
Can JCOM meet its short-term obligations with the cash in hand?
Looking at JCOM’s US$349m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$436m, with a current ratio of 1.25x. The current ratio is calculated by dividing current assets by current liabilities. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is JCOM’s debt level acceptable?
JCOM is a relatively highly levered company with a debt-to-equity of 96%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if JCOM’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 JCOM, the ratio of 4.32x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving JCOM ample headroom to grow its debt facilities.
JCOM’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. Since there is also no concerns around JCOM's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure JCOM has company-specific issues impacting its capital structure decisions. I recommend you continue to research j2 Global to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JCOM’s future growth? Take a look at our free research report of analyst consensus for JCOM’s outlook.
- Valuation: What is JCOM 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 JCOM 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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