J.Jill, Inc. (NYSE:JILL) is a small-cap stock with a market capitalization of US$195m. 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? Understanding the company's financial health becomes essential, 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. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into JILL here.
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JILL’s Debt (And Cash Flows)
Over the past year, JILL has maintained its debt levels at around US$240m – this includes long-term debt. At this current level of debt, JILL's cash and short-term investments stands at US$66m , ready to be used for running the business. Moreover, JILL has produced cash from operations of US$68m in the last twelve months, leading to an operating cash to total debt ratio of 28%, signalling that JILL’s debt is appropriately covered by operating cash.
Does JILL’s liquid assets cover its short-term commitments?
Looking at JILL’s US$103m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is JILL’s debt level acceptable?
Since total debt levels exceed equity, JILL is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether JILL 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 JILL's, case, the ratio of 3.21x 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.
JILL’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 JILL's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for JILL's financial health. Other important fundamentals need to be considered alongside. You should continue to research J.Jill to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JILL’s future growth? Take a look at our free research report of analyst consensus for JILL’s outlook.
- Valuation: What is JILL 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 JILL 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.
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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.