While small-cap stocks, such as Jash Engineering Limited (NSE:JASH) with its market cap of ₹1.4b, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into JASH here.
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Does JASH Produce Much Cash Relative To Its Debt?
Over the past year, JASH has ramped up its debt from ₹520m to ₹640m , which includes long-term debt. With this growth in debt, JASH's cash and short-term investments stands at ₹107m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of JASH’s operating efficiency ratios such as ROA here.
Does JASH’s liquid assets cover its short-term commitments?
Looking at JASH’s ₹1.0b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does JASH face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 60%, JASH can be considered as an above-average leveraged company. 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 JASH's case, the ratio of 0.64x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as JASH’s low interest coverage already puts the company at higher risk of default.
JASH’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. Since there is also no concerns around JASH's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how JASH has been performing in the past. I recommend you continue to research Jash Engineering to get a better picture of the small-cap by looking at:
- Historical Performance: What has JASH'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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