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Mid-caps stocks, like Aluminum Corporation of China Limited (HKG:2600) with a market capitalization of HK$67b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. 2600’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 2600 here.
Does 2600 Produce Much Cash Relative To Its Debt?
2600 has sustained its debt level by about CN¥106b over the last 12 months which accounts for long term debt. At this stable level of debt, 2600's cash and short-term investments stands at CN¥18b to keep the business going. On top of this, 2600 has generated cash from operations of CN¥11b during the same period of time, resulting in an operating cash to total debt ratio of 10%, signalling that 2600’s operating cash is less than its debt.
Does 2600’s liquid assets cover its short-term commitments?
With current liabilities at CN¥80b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is calculated by dividing current assets by current liabilities.
Is 2600’s debt level acceptable?
2600 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 2600’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 2600, the ratio of 1.98x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 2600’s low interest coverage already puts the company at higher risk of default.
2600’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how 2600 has been performing in the past. You should continue to research Aluminum of China to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 2600’s future growth? Take a look at our free research report of analyst consensus for 2600’s outlook.
- Valuation: What is 2600 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 2600 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.