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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Zhaojin Mining Industry Company Limited (HKG:1818), with a market capitalization of HK$30b, rarely draw their attention from the investing community. 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. 1818’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 1818 here.
1818’s Debt (And Cash Flows)
1818's debt levels surged from CN¥13b to CN¥15b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥1.7b to keep the business going. Moreover, 1818 has generated cash from operations of CN¥1.7b over the same time period, leading to an operating cash to total debt ratio of 12%, meaning that 1818’s operating cash is less than its debt.
Can 1818 pay its short-term liabilities?
Looking at 1818’s CN¥12b in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.76x. The current ratio is the number you get when you divide current assets by current liabilities.
Can 1818 service its debt comfortably?
1818 is a relatively highly levered company with a debt-to-equity of 87%. 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 1818’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 1818, the ratio of 2.2x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
1818’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for 1818's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Zhaojin Mining Industry to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1818’s future growth? Take a look at our free research report of analyst consensus for 1818’s outlook.
- Valuation: What is 1818 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 1818 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 firstname.lastname@example.org. 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.