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Jinhui Shipping and Transportation Limited (OB:JIN) is a small-cap stock with a market capitalization of ØRE919.96M. 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? Since JIN is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into JIN here.
How does JIN’s operating cash flow stack up against its debt?
Over the past year, JIN has reduced its debt from US$212.62M to US$137.91M , which is made up of current and long term debt. With this debt payback, JIN’s cash and short-term investments stands at US$101.92M , ready to deploy into the business. Moreover, JIN has generated US$40.01M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 29.01%, indicating that JIN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In JIN’s case, it is able to generate 0.29x cash from its debt capital.
Can JIN pay its short-term liabilities?
Looking at JIN’s most recent US$83.54M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$125.50M, leading to a 1.5x current account ratio. Usually, for Shipping companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is JIN’s debt level acceptable?
JIN is a relatively highly levered company with a debt-to-equity of 56.28%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since JIN is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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JIN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for JIN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Jinhui Shipping and Transportation to get a more holistic view of the small-cap by looking at: