Investors are always looking for growth in small-cap stocks like China Jo-Jo Drugstores Inc (NASDAQ:CJJD), with a market cap of US$33.54M. However, an important fact which most ignore is: how financially healthy is the business? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CJJD here.
Does CJJD generate an acceptable amount of cash through operations?
CJJD’s debt levels have fallen from US$19.25M to US$13.62M over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, CJJD’s cash and short-term investments stands at US$18.45M , ready to deploy into the business. Additionally, CJJD has produced US$1.56M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 11.45%, signalling that CJJD’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In CJJD’s case, it is able to generate 0.11x cash from its debt capital.
Does CJJD’s liquid assets cover its short-term commitments?
Looking at CJJD’s most recent US$40.01M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$55.96M, leading to a 1.4x current account ratio. Usually, for Consumer Retailing companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CJJD face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 79.91%, CJJD 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. However, since CJJD is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
CJJD’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CJJD has company-specific issues impacting its capital structure decisions. You should continue to research China Jo-Jo Drugstores to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has CJJD’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.
- 2. 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.