While small-cap stocks, such as JM AB (publ) (OM:JM) with its market cap of KR13.29B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into JM here.
How does JM’s operating cash flow stack up against its debt?
JM’s debt levels have fallen from KR2.90B to KR2.38B over the last 12 months , which is made up of current and long term debt. With this reduction in debt, JM’s cash and short-term investments stands at KR2.57B , ready to deploy into the business. Additionally, JM has produced cash from operations of KR2.40B over the same time period, leading to an operating cash to total debt ratio of 100.97%, meaning that JM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JM’s case, it is able to generate 1.01x cash from its debt capital.
Can JM meet its short-term obligations with the cash in hand?
Looking at JM’s most recent KR7.81B liabilities, it seems that the business has been able to meet these commitments with a current assets level of KR16.74B, leading to a 2.14x current account ratio. Generally, for Consumer Durables 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.
Does JM face the risk of succumbing to its debt-load?
With debt at 36.64% of equity, JM may be thought of as appropriately levered. JM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether JM 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 JM’s, case, the ratio of 69.09x suggests that interest is comfortably 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:
JM’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure JM has company-specific issues impacting its capital structure decisions. I suggest you continue to research JM to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JM’s future growth? Take a look at our free research report of analyst consensus for JM’s outlook.
- Valuation: What is JM 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 JM 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.