Yahoo Finance Are Johns Lyng Group Limited’s (ASX:JLG) Interest Costs Too High?
Johns Lyng Group Limited (ASX:JLG) is a small-cap stock with a market capitalization of AU$203m. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into JLG here.
Does JLG produce enough cash relative to debt?
JLG’s debt levels have fallen from AU$21m to AU$4.4m over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, JLG’s cash and short-term investments stands at AU$22m for investing into the business. Additionally, JLG has generated cash from operations of AU$17m in the last twelve months, leading to an operating cash to total debt ratio of 376%, signalling that JLG’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 JLG’s case, it is able to generate 3.76x cash from its debt capital.
Can JLG meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$59m, it appears that the company has been able to meet these obligations given the level of current assets of AU$81m, with a current ratio of 1.36x. Usually, for Construction 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 JLG’s debt level acceptable?
With debt at 13% of equity, JLG may be thought of as appropriately levered. JLG is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether JLG 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 JLG’s, case, the ratio of 205x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving JLG ample headroom to grow its debt facilities.
Next Steps:
JLG 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. This is only a rough assessment of financial health, and I’m sure JLG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Johns Lyng Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JLG’s future growth? Take a look at our free research report of analyst consensus for JLG’s outlook.
Valuation: What is JLG 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 JLG 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
