Is Jash Engineering Limited's (NSE:JASH) Balance Sheet A Threat To Its Future?

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Jash Engineering Limited (NSE:JASH) is a small-cap stock with a market capitalization of ₹1.1b. 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? Evaluating financial health as part of your investment thesis is 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. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into JASH here.

How much cash does JASH generate through its operations?

JASH has built up its total debt levels in the last twelve months, from ₹520m to ₹640m – this includes long-term debt. With this increase in debt, JASH's cash and short-term investments stands at ₹107m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of JASH’s operating efficiency ratios such as ROA here.

Can JASH pay its short-term liabilities?

Looking at JASH’s ₹1.0b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can JASH service its debt comfortably?

With debt reaching 60% of equity, JASH may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if JASH’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 JASH, the ratio of 0.64x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although JASH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around JASH's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for JASH's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Jash Engineering to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for JASH’s future growth? Take a look at our free research report of analyst consensus for JASH’s outlook.
2. 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.
3. 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.