Jet Knitwears Limited (NSEI:JETKNIT) is a small-cap stock with a market capitalization of IN₨449.15M. 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into JETKNIT here.
How does JETKNIT’s operating cash flow stack up against its debt?
JETKNIT has shrunken its total debt levels in the last twelve months, from IN₨118.17M to IN₨91.89M – this includes both the current and long-term debt. With this reduction in debt, JETKNIT’s cash and short-term investments stands at IN₨12.72M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of JETKNIT’s operating efficiency ratios such as ROA here.
Can JETKNIT meet its short-term obligations with the cash in hand?
Looking at JETKNIT’s most recent IN₨129.48M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of IN₨221.38M, with a current ratio of 1.71x. Usually, for Luxury companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does JETKNIT face the risk of succumbing to its debt-load?JETKNIT is a relatively highly levered company with a debt-to-equity of 76.91%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether JETKNIT 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 JETKNIT’s, case, the ratio of 2.14x 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.
JETKNIT’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how JETKNIT has been performing in the past. I suggest you continue to research Jet Knitwears to get a better picture of the stock by looking at:
- 1. Historical Performance: What has JETKNIT’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.