While small-cap stocks, such as Coffee Holding Co., Inc. (NASDAQ:JVA) with its market cap of US$39m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into JVA here.
How much cash does JVA generate through its operations?
JVA’s debt levels have fallen from US$8.4m to US$6.3m over the last 12 months . With this debt payback, JVA currently has US$4.6m remaining in cash and short-term investments for investing into the business. On top of this, JVA has produced US$8.7m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 137%, signalling that JVA’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 JVA’s case, it is able to generate 1.37x cash from its debt capital.
Does JVA’s liquid assets cover its short-term commitments?
At the current liabilities level of US$11m, it appears that the company has been able to meet these obligations given the level of current assets of US$31m, with a current ratio of 2.75x. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is JVA’s debt level acceptable?
With debt at 24% of equity, JVA may be thought of as appropriately levered. JVA is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether JVA 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 JVA’s, case, the ratio of 6.72x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving JVA ample headroom to grow its debt facilities.
JVA’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. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for JVA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Coffee Holding to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JVA’s future growth? Take a look at our free research report of analyst consensus for JVA’s outlook.
- Valuation: What is JVA 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 JVA 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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