Will A Recession Harm Jardine Cycle & Carriage Ltd?

Asia is no stranger to recessions. As such, a recession scenario can be something to think about before we invest.

At home, Singapore’s economy suffered during the Global Financial Crisis of 2008-2009. In the third-quarter last year, Singapore had narrowly missed entering a technical recession. If history is a guide, it’s almost a certainty that there will be harder times for the economies of Singapore and other parts of Asia at some point in the future.

When that happens, we want to be sure that the companies we invest in can survive or even thrive.

Measuring the strength of the balance sheet

“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations.”

– Warren Buffett

Having a strong balance sheet can be of great help to companies in meeting the demands of recessionary episodes. We can get a quick idea of a company’s balance sheet strength using two simple ratios.

Let’s run vehicle distributor, Jardine Cycle & Carriage Ltd  (SGX: C07), through both ratios today. In 2014, over 90% of its revenue had come from Indonesia. We will be using the company’s figures for the quarter ended 30 September 2015.

The first ratio I’m interested in is called the current ratio. A measure of just how much liquidity a company has, this number is simply a company’s current assets divided by its current liabilities.

Jardine C&C’s Current Assets US$7.7 billion
Jardine C&C’s Current Liabilities US$5.7 billion
Current Ratio 1.35

Source: Jardine C&C’s earnings report

I am looking for a current ratio of more than 1.5 in general. With its current ratio of 1.35, Jardine C&C misses the mark. It’s worth noting too that as of 30 September 2015, the conglomerate had US$1.8 billion in cash and equivalents but over US$4.95 billion in borrowings.

Let’s now look at the second ratio: the quick ratio.

It is similar to the current ratio, but it takes the company’s inventory out of the equation. This is because inventories may not always be worth the amount that are recorded in the books. By removing inventory from the picture, you can find out if a company really has sufficient liquid assets to meet short-term operating needs.

Jardine C&C’s Current Assets US$7.7 billion
Jardine C&C’s Current Liabilities US$5.7 billion
Jardine C&C’s Inventory US$1.4 billion
Quick Ratio 1.1

Source: Jardine C&C’s earnings report

Generally speaking, I like to see a quick ratio of more than 1. And as you can tell, Jardine C&C has cleared the hurdle here.

Inventory makes up less than 20% of Jardine C&C’s current assets. The majority of its current assets is made up of the current debtors line account, which can be thought of as payments that the company’s customers have yet to make.

As such, making sure that Jardine C&C is able to collect cash from its customers could be an area of focus for investors. Elsewhere, the bulk of the firm’s current liabilities is made up of current creditors and current borrowings.

Foolish summary

The two ratios above give you a hint on how Jardine C&C is able to finance its current obligations when they become due.

They represent useful starting points, but further study is required to understand whether the company’s business is really able to sustain itself when a recession comes knocking on the door.

(Learn how to calculate the current ratio and quick ratio here.)

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.