Is J C. Penney Company Inc. (NYSE:JCP) A Financially Sound Company?
J C. Penney Company Inc. (NYSE:JCP) is a small-cap stock with a market capitalization of US$913.02M. 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? Multiline Retail businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into JCP here.
Does JCP generate enough cash through operations?
JCP’s debt levels have fallen from US$4.85B to US$4.23B over the last 12 months , which comprises of short- and long-term debt. With this debt payback, JCP’s cash and short-term investments stands at US$458.00M for investing into the business. Additionally, JCP has generated US$454.00M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 10.73%, indicating that JCP’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In JCP’s case, it is able to generate 0.11x cash from its debt capital.
Can JCP meet its short-term obligations with the cash in hand?
Looking at JCP’s most recent US$2.33B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.41B, with a current ratio of 1.46x. For Multiline Retail 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 JCP’s debt level acceptable?
JCP is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since JCP is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, JCP has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure JCP has company-specific issues impacting its capital structure decisions. I recommend you continue to research J. C. Penney Company to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JCP’s future growth? Take a look at our free research report of analyst consensus for JCP’s outlook.
Valuation: What is JCP 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 JCP 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.
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.
