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Jatenergy Limited (ASX:JAT) is a small-cap stock with a market capitalization of AU$46m. 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? Given that JAT is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into JAT here.
JAT’s Debt (And Cash Flows)
In the previous 12 months, JAT's rose by about AU$4.4m – which includes long-term debt. With this growth in debt, JAT currently has AU$5.3m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of JAT’s operating efficiency ratios such as ROA here.
Can JAT pay its short-term liabilities?
At the current liabilities level of AU$10m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is calculated by dividing current assets by current liabilities. For Retail Distributors 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 JAT service its debt comfortably?
With debt at 14% of equity, JAT may be thought of as appropriately levered. JAT is not taking on too much debt commitment, which may be constraining for future growth. Investors' risk associated with debt is very low with JAT, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
JAT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how JAT has been performing in the past. You should continue to research Jatenergy to get a more holistic view of the stock by looking at:
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Historical Performance: What has JAT'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.
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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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