Investors are always looking for growth in small-cap stocks like Joyce Corporation Ltd (ASX:JYC), with a market cap of AU$41.11M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into JYC here.
How does JYC’s operating cash flow stack up against its debt?
JYC has increased its debt level by about AU$8.60M over the last 12 months – this includes both the current and long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at AU$5.30M , ready to deploy into the business. Additionally, JYC has generated AU$5.34M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 62.03%, indicating that JYC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of 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 AU$12.59M, it seems that the business has not been able to meet these commitments with a current assets level of AU$11.72M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Can JYC service its debt comfortably?
JYC’s level of debt is appropriate relative to its total equity, at 36.60%. JYC is not taking on too much debt commitment, which may be constraining for future growth. We can test if JYC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For JYC, the ratio of 73.45x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving JYC ample headroom to grow its debt facilities.
Next Steps:
JYC’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how JYC has been performing in the past. I suggest you continue to research Joyce to get a better picture of the stock by looking at: