Investors are always looking for growth in small-cap stocks like China Jo-Jo Drugstores Inc (NASDAQ:CJJD), with a market cap of USD $37.36M. However, an important fact which most ignore is: how financially healthy is the business? Food and Staples Retailing businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CJJD here.
How does CJJD’s operating cash flow stack up against its debt?
CJJD’s debt levels have fallen from $19.2M to $13.6M over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, the current cash and short-term investment levels stands at $18.5M , ready to deploy into the business. Moreover, CJJD has generated cash from operations of $1.6M during the same period of time, leading to an operating cash to total debt ratio of 0.11x, indicating that CJJD’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses 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.
Can CJJD meet its short-term obligations with the cash in hand?
With current liabilities at $40.0M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $56.0M, with a current ratio of 1.4x. Usually, for food and staples retailing companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CJJD service its debt comfortably?
With a debt-to-equity ratio of 52.70%, 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. But since CJJD is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Are you a shareholder? At its current level of cash flow coverage, CJJD has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend researching market expectations for CJJD’s future growth on our free analysis platform.
Are you a potential investor? Though near-term liquidity isn’t a concern, CJJD’s high debt levels on top of low cash coverage of debt may not be what you’re after in an investment. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of CJJD’s track record. I encourage you to continue your research by taking a look at CJJD’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.