U.S. Markets closed

Is Guangshen Railway Company Limited's (HKG:525) Liquidity Good Enough?

Simply Wall St

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Guangshen Railway Company Limited (HKG:525) with a market-capitalization of HK$24b, rarely draw their attention. 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. This article will examine 525’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 525 here.

See our latest analysis for Guangshen Railway

Can 525 service its debt comfortably?

A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For 525, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with 525, and the company has plenty of headroom and ability to raise debt should it need to in the future.

SEHK:525 Historical Debt, July 22nd 2019

Can 525 pay its short-term liabilities?

Since Guangshen Railway doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of CN¥5.9b, the company has been able to meet these obligations given the level of current assets of CN¥6.4b, with a current ratio of 1.1x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Transportation companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

525 has zero-debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, however, some level of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for 525's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Guangshen Railway to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 525’s future growth? Take a look at our free research report of analyst consensus for 525’s outlook.
  2. Valuation: What is 525 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 525 is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.