Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Angang Steel Company Limited (SEHK:347) with a market-capitalization of HK$56.34B, rarely draw their attention and few analysts cover them. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I will take you through a few basic checks to assess the financial health of companies with no debt. See our latest analysis for Angang Steel
Is 347’s debt level acceptable?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For 347, the debt-to-equity ratio is 48.03%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. We can test if 347’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. 347’s interest on debt is sufficiently covered by earnings as it sits at around 5.03x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Can 347 meet its short-term obligations with the cash in hand?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare 347’s cash and other liquid assets against its upcoming debt. Our analysis shows that 347 does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Are you a shareholder? At its current level of cash flow coverage, investors should ask themselves if they believe 347 can sustainably improve cash flows to better cushion for events which may require debt repayment. Since 347’s financial situation could change, You should continue assessing market expectations for 347’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. 347’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.