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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like China Traditional Chinese Medicine Holdings Co. Limited (HKG:570), with a market cap of HK$20b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at 570’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 570 here.
Does 570 Produce Much Cash Relative To Its Debt?
Over the past year, 570 has ramped up its debt from CN¥5.2b to CN¥6.1b , which includes long-term debt. With this increase in debt, 570 currently has CN¥6.5b remaining in cash and short-term investments to keep the business going. Additionally, 570 has generated CN¥1.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 19%, meaning that 570’s debt is not covered by operating cash.
Can 570 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥8.6b, it appears that the company has been able to meet these obligations given the level of current assets of CN¥14b, with a current ratio of 1.68x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 570 service its debt comfortably?
570’s level of debt is appropriate relative to its total equity, at 35%. 570 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 570’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 570, the ratio of 8.44x suggests that interest is appropriately 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.
570’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure 570 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Traditional Chinese Medicine Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 570’s future growth? Take a look at our free research report of analyst consensus for 570’s outlook.
- Valuation: What is 570 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 570 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.