Joyce Corporation Ltd (ASX:JYC) is a small-cap stock with a market capitalization of A$40.28M. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into JYC here.
Does JYC generate an acceptable amount of cash through operations?
Over the past year, JYC has borrowed debt capital of around A$8.6M made up of current and long term debt. With this growth in debt, JYC currently has A$5.3M remaining in cash and short-term investments , ready to deploy into the business. Moreover, JYC has generated A$5.3M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 62.03%, indicating that JYC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JYC’s case, it is able to generate 0.62x cash from its debt capital.
Does JYC’s liquid assets cover its short-term commitments?
With current liabilities at A$12.6M, it seems that the business has not been able to meet these commitments with a current assets level of A$11.7M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Is JYC’s debt level acceptable?
JYC’s level of debt is appropriate relative to its total equity, at 32.47%. JYC is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
JYC’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how JYC has been performing in the past. You should continue to research Joyce to get a better picture of the stock by looking at:
1. Valuation: What is JYC 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 JYC is currently mispriced by the market.