What does CSSC Offshore & Marine Engineering (Group) Company Limited's (HKG:317) Balance Sheet Tell Us About Its Future?

Mid-caps stocks, like CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) with a market capitalization of HK$16b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at 317’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 317 here.

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See our latest analysis for CSSC Offshore & Marine Engineering (Group)

317’s Debt (And Cash Flows)

317's debt levels surged from CN¥9.6b to CN¥14b over the last 12 months – this includes long-term debt. With this growth in debt, 317's cash and short-term investments stands at CN¥7.8b to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 317’s operating efficiency ratios such as ROA here.

Can 317 pay its short-term liabilities?

At the current liabilities level of CN¥26b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥27b, with a current ratio of 1.07x. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Can 317 service its debt comfortably?

With a debt-to-equity ratio of 97%, 317 can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 317 is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

317’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. Keep in mind I haven't considered other factors such as how 317 has been performing in the past. You should continue to research CSSC Offshore & Marine Engineering (Group) to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 317’s future growth? Take a look at our free research report of analyst consensus for 317’s outlook.
2. Historical Performance: What has 317's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.