Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Zhongsheng Group Holdings Limited (HKG:881) with a market-capitalization of HK$49b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. 881’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 881 here.
Does 881 Produce Much Cash Relative To Its Debt?
881 has built up its total debt levels in the last twelve months, from CN¥21b to CN¥27b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥6.7b to keep the business going. Additionally, 881 has generated CN¥2.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 8.7%, meaning that 881’s debt is not covered by operating cash.
Does 881’s liquid assets cover its short-term commitments?
Looking at 881’s CN¥27b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.15x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 881 face the risk of succumbing to its debt-load?
With total debt exceeding equity, 881 is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 881's case, the ratio of 5.46x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 881 ample headroom to grow its debt facilities.
881’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. Since there is also no concerns around 881's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 881 has been performing in the past. You should continue to research Zhongsheng Group Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 881’s future growth? Take a look at our free research report of analyst consensus for 881’s outlook.
- Valuation: What is 881 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 881 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.
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