Jinhui Shipping and Transportation Limited (OB:JIN) is a small-cap stock with a market capitalization of øre847m. 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? Assessing first and foremost the financial health is essential, 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into JIN here.
How much cash does JIN generate through its operations?
JIN’s debt levels have fallen from US$140m to US$85m over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$83m , ready to deploy into the business. Moreover, JIN has produced US$5.9m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 6.9%, signalling that JIN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JIN’s case, it is able to generate 0.069x cash from its debt capital.
Can JIN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$70m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.53x. Usually, for Shipping companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does JIN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34%, JIN’s debt level may be seen as prudent. This range is considered safe as JIN is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether JIN 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 JIN’s, case, the ratio of 2.68x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as JIN’s low interest coverage already puts the company at higher risk of default.
JIN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure JIN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Jinhui Shipping and Transportation to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JIN’s future growth? Take a look at our free research report of analyst consensus for JIN’s outlook.
- Valuation: What is JIN 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 JIN 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 email@example.com.