Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Shangri-La Asia Limited (HKG:69), with a market cap of HK$35b, often get neglected by retail investors. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at 69’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 69 here.
Does 69 Produce Much Cash Relative To Its Debt?
69's debt level has been constant at around US$5.2b over the previous year including long-term debt. At this constant level of debt, 69 currently has US$1.1b remaining in cash and short-term investments to keep the business going. Additionally, 69 has produced cash from operations of US$446m over the same time period, leading to an operating cash to total debt ratio of 8.6%, meaning that 69’s debt is not covered by operating cash.
Does 69’s liquid assets cover its short-term commitments?
With current liabilities at US$1.5b, it seems that the business has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.11x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can 69 service its debt comfortably?
With debt reaching 78% of equity, 69 may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 69 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 69's, case, the ratio of 2.12x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although 69’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how 69 has been performing in the past. You should continue to research Shangri-La Asia to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 69’s future growth? Take a look at our free research report of analyst consensus for 69’s outlook.
- Valuation: What is 69 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 69 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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