While small-cap stocks, such as Jersey Electricity plc (LSE:JEL) with its market cap of UK£146.46M, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into JEL here.
Does JEL generate enough cash through operations?
JEL’s debt level has been constant at around UK£30.24M over the previous year comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£8.08M , ready to deploy into the business. Moreover, JEL has generated UK£26.46M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 87.52%, meaning that JEL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JEL’s case, it is able to generate 0.88x cash from its debt capital.
Can JEL pay its short-term liabilities?
Looking at JEL’s most recent UK£16.92M liabilities, the company has been able to meet these commitments with a current assets level of UK£35.14M, leading to a 2.08x current account ratio. Generally, for Electric Utilities companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can JEL service its debt comfortably?
With debt at 17.15% of equity, JEL may be thought of as appropriately levered. JEL is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether JEL 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 JEL’s, case, the ratio of 11.04x suggests that interest is comfortably 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:
JEL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how JEL has been performing in the past. You should continue to research Jersey Electricity to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JEL’s future growth? Take a look at our free research report of analyst consensus for JEL’s outlook.
- Valuation: What is JEL 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 JEL 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.