Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as The Hongkong and Shanghai Hotels Limited (HKG:45), with a market capitalization of HK$16.56b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. 45’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 45 here.
How much cash does 45 generate through its operations?
45’s debt levels have fallen from HK$7.20b to HK$6.62b over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, 45’s cash and short-term investments stands at HK$781.00m for investing into the business. Additionally, 45 has generated cash from operations of HK$1.40b over the same time period, resulting in an operating cash to total debt ratio of 21.15%, meaning that 45’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 45’s case, it is able to generate 0.21x cash from its debt capital.
Can 45 pay its short-term liabilities?
Looking at 45’s most recent HK$3.50b liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.46x, which is below the prudent industry ratio of 3x.
Can 45 service its debt comfortably?
With a debt-to-equity ratio of 16.90%, 45’s debt level may be seen as prudent. 45 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 45 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 45’s, case, the ratio of 19.43x suggests that interest is comfortably 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.
Although 45’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, 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 45 has been performing in the past. You should continue to research Hongkong and Shanghai Hotels to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 45’s future growth? Take a look at our free research report of analyst consensus for 45’s outlook.
- Historical Performance: What has 45’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
To help readers see past 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.
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