Jet Knitwears Limited (NSE:JETKNIT) is a small-cap stock with a market capitalization of ₹231m. 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 few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into JETKNIT here.
How does JETKNIT’s operating cash flow stack up against its debt?
Over the past year, JETKNIT has ramped up its debt from ₹89m to ₹101m , which includes long-term debt. With this growth in debt, JETKNIT currently has ₹14m remaining in cash and short-term investments 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 assess some of JETKNIT’s operating efficiency ratios such as ROA here.
Does JETKNIT’s liquid assets cover its short-term commitments?
With current liabilities at ₹142m, the company has been able to meet these obligations given the level of current assets of ₹277m, with a current ratio of 1.95x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does JETKNIT face the risk of succumbing to its debt-load?
With debt reaching 68% of equity, JETKNIT 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 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 2.69x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as JETKNIT’s low interest coverage already puts the company at higher risk of default.
Although JETKNIT’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 JETKNIT’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how JETKNIT has been performing in the past. You should continue to research Jet Knitwears to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JETKNIT’s future growth? Take a look at our free research report of analyst consensus for JETKNIT’s outlook.
- 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.
- 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 email@example.com.