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Is Xinyi Solar Holdings Limited's (HKG:968) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Mid-caps stocks, like Xinyi Solar Holdings Limited (HKG:968) with a market capitalization of HK$34b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at 968’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 968 here.

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Check out our latest analysis for Xinyi Solar Holdings

968’s Debt (And Cash Flows)

968 has built up its total debt levels in the last twelve months, from HK$7.9b to HK$8.8b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$981m to keep the business going. On top of this, 968 has produced cash from operations of HK$2.3b during the same period of time, resulting in an operating cash to total debt ratio of 26%, indicating that 968’s current level of operating cash is high enough to cover debt.

Can 968 pay its short-term liabilities?

With current liabilities at HK$6.7b, the company has been able to meet these obligations given the level of current assets of HK$6.8b, with a current ratio of 1.01x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:968 Historical Debt, May 21st 2019

Can 968 service its debt comfortably?

With debt reaching 73% of equity, 968 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. 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 968's case, the ratio of 9.95x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 968’s high interest coverage is seen as responsible and safe practice.

Next Steps:

968’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure 968 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Xinyi Solar Holdings to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 968’s future growth? Take a look at our free research report of analyst consensus for 968’s outlook.
  2. Valuation: What is 968 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 968 is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.