Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) with a market-capitalization of HK$29b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at 2386’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 2386 here.
Does 2386 produce enough cash relative to debt?
Over the past year, 2386 has ramped up its debt from CN¥244m to CN¥569m made up of predominantly near term debt. With this rise in debt, 2386’s cash and short-term investments stands at CN¥14b for investing into the business. Moreover, 2386 has generated CN¥3.9b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 693%, meaning that 2386’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 2386’s case, it is able to generate 6.93x cash from its debt capital.
Does 2386’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥32b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.66x. Generally, for Construction companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 2386’s debt level acceptable?
With debt at 2.2% of equity, 2386 may be thought of as having low leverage. This range is considered safe as 2386 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
2386 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 2386’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research SINOPEC Engineering (Group) to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 2386’s future growth? Take a look at our free research report of analyst consensus for 2386’s outlook.
- Valuation: What is 2386 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 2386 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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.