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Stocks with market capitalization between $2B and $10B, such as Samsonite International S.A. (HKG:1910) with a size of HK$23b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at 1910’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Samsonite International’s financial health, so you should conduct further analysis into 1910 here.
Does 1910 Produce Much Cash Relative To Its Debt?
Over the past year, 1910 has ramped up its debt from US$1.9b to US$2.6b – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$392m , ready to be used for running the business. On top of this, 1910 has produced US$371m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14%, indicating that 1910’s operating cash is less than its debt.
Can 1910 pay its short-term liabilities?
With current liabilities at US$940m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.64x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Luxury companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1910 service its debt comfortably?
With a debt-to-equity ratio of 95%, 1910 can be considered as an above-average leveraged company. 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 1910’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 1910, the ratio of 6.1x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1910’s high interest coverage is seen as responsible and safe practice.
Although 1910’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 1910's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 1910 has company-specific issues impacting its capital structure decisions. You should continue to research Samsonite International to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1910’s future growth? Take a look at our free research report of analyst consensus for 1910’s outlook.
- Valuation: What is 1910 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 1910 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 email@example.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.