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While small-cap stocks, such as Jagged Peak Energy Inc. (NYSE:JAG) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to 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, potential investors would need to take a closer look, and I recommend you dig deeper yourself into JAG here.
Does JAG Produce Much Cash Relative To Its Debt?
JAG has built up its total debt levels in the last twelve months, from US$265m to US$614m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$6.5m , ready to be used for running the business. Additionally, JAG has produced US$426m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 69%, meaning that JAG’s debt is appropriately covered by operating cash.
Can JAG meet its short-term obligations with the cash in hand?
Looking at JAG’s US$244m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$90m, leading to a current ratio of 0.37x. The current ratio is the number you get when you divide current assets by current liabilities.
Is JAG’s debt level acceptable?
JAG is a relatively highly levered company with a debt-to-equity of 64%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether JAG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JAG's, case, the ratio of 5.45x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although JAG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how JAG has been performing in the past. I recommend you continue to research Jagged Peak Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JAG’s future growth? Take a look at our free research report of analyst consensus for JAG’s outlook.
- Historical Performance: What has JAG'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.
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.
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.