What does John Lewis of Hungerford plc's (LON:JLH) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like John Lewis of Hungerford plc (LON:JLH), with a market cap of UK£1.89m. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into JLH here.

Does JLH produce enough cash relative to debt?

Over the past year, JLH has reduced its debt from UK£651.00k to UK£568.00k , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£561.00k , ready to deploy into the business. On top of this, JLH has generated UK£250.29k in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 44.06%, signalling that JLH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JLH’s case, it is able to generate 0.44x cash from its debt capital.

Does JLH’s liquid assets cover its short-term commitments?

Looking at JLH’s most recent UK£1.33m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of UK£1.01m, with a current ratio of 0.76x below the prudent level of 3x.

Is JLH’s debt level acceptable?

JLH’s level of debt is appropriate relative to its total equity, at 38.69%. This range is considered safe as JLH is not taking on too much debt obligation, which may be constraining for future growth. We can test if JLH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For JLH, the ratio of 5.23x 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.

Next Steps:

JLH’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how JLH has been performing in the past. I recommend you continue to research John Lewis of Hungerford to get a more holistic view of the stock by looking at:

1. Historical Performance: What has JLH'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.
2. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.