Investors are always looking for growth in small-cap stocks like Jersey Electricity plc (LON:JEL), with a market cap of UK£140m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into JEL here.
Does JEL produce enough cash relative to debt?
Over the past year, JEL has reduced its debt from UK£34m to UK£30m – this includes long-term debt. With this reduction in debt, JEL’s cash and short-term investments stands at UK£9.8m for investing into the business. Moreover, JEL has produced cash from operations of UK£28m over the same time period, leading to an operating cash to total debt ratio of 94%, meaning that JEL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JEL’s case, it is able to generate 0.94x cash from its debt capital.
Does JEL’s liquid assets cover its short-term commitments?
Looking at JEL’s UK£17m 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 2.43x. Usually, for Electric Utilities companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can JEL service its debt comfortably?
With a debt-to-equity ratio of 17%, JEL’s debt level may be seen as prudent. This range is considered safe as JEL is not taking on too much debt obligation, which may be constraining for future growth. We can test if JEL’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 JEL, the ratio of 10.79x 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’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for JEL’s financial health. Other important fundamentals need to be considered alongside. 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.
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.