What Investors Should Know About Just Life Group Limited's (NZSE:JLG) Financial Strength
Just Life Group Limited (NZSE:JLG) is a small-cap stock with a market capitalization of NZ$39m. 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into JLG here.
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Does JLG Produce Much Cash Relative To Its Debt?
Over the past year, JLG has ramped up its debt from NZ$2.1m to NZ$11m – this includes long-term debt. With this rise in debt, JLG's cash and short-term investments stands at below NZ$10K, which is rather low. However, JLG has generated NZ$3.0m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that debt is appropriately covered by operating cash.
Can JLG pay its short-term liabilities?
Looking at JLG’s NZ$5.1m in current liabilities, the company has been able to meet these commitments with a current assets level of NZ$6.2m, leading to a 1.22x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Specialty Retail companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can JLG service its debt comfortably?
With a debt-to-equity ratio of 82%, JLG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if JLG’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 JLG, the ratio of 8.47x suggests that interest is appropriately 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:
JLG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around JLG'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 JLG has been performing in the past. You should continue to research Just Life Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JLG’s future growth? Take a look at our free research report of analyst consensus for JLG’s outlook.
- Valuation: What is JLG 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 JLG 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.
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