Is Johnson Service Group PLC (LON:JSG) A Financially Sound Company?
Johnson Service Group PLC (LON:JSG) is a small-cap stock with a market capitalization of UK£492m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into JSG here.
JSG’s Debt (And Cash Flows)
Over the past year, JSG has ramped up its debt from UK£97m to UK£106m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£7.1m , ready to be used for running the business. Moreover, JSG has generated UK£83m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 78%, indicating that JSG’s debt is appropriately covered by operating cash.
Can JSG pay its short-term liabilities?
With current liabilities at UK£86m, the company may not have an easy time meeting these commitments with a current assets level of UK£62m, leading to a current ratio of 0.72x. The current ratio is calculated by dividing current assets by current liabilities.
Is JSG’s debt level acceptable?
With a debt-to-equity ratio of 55%, JSG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JSG’s case, the ratio of 11.53x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
JSG’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for JSG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Johnson Service Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JSG’s future growth? Take a look at our free research report of analyst consensus for JSG’s outlook.
Valuation: What is JSG 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 JSG 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.
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