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New Jersey Resources Corporation (NYSE:NJR) 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? 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into NJR here.
Does NJR Produce Much Cash Relative To Its Debt?
Over the past year, NJR has maintained its debt levels at around US$1.4b – this includes long-term debt. At this current level of debt, NJR currently has US$83m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NJR has produced cash from operations of US$258m in the last twelve months, resulting in an operating cash to total debt ratio of 19%, indicating that NJR’s operating cash is less than its debt.
Can NJR pay its short-term liabilities?
With current liabilities at US$584m, it seems that the business has been able to meet these obligations given the level of current assets of US$605m, with a current ratio of 1.04x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Gas Utilities companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is NJR’s debt level acceptable?
NJR is a relatively highly levered company with a debt-to-equity of 86%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NJR's case, the ratio of 2.38x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
NJR’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure NJR has company-specific issues impacting its capital structure decisions. I suggest you continue to research New Jersey Resources to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NJR’s future growth? Take a look at our free research report of analyst consensus for NJR’s outlook.
- Historical Performance: What has NJR'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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.