Mid-caps stocks, like Yue Yuen Industrial (Holdings) Limited (HKG:551) with a market capitalization of HK$34.3b, 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. Let’s take a look at 551’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 551 here.
Does 551 produce enough cash relative to debt?
551 has built up its total debt levels in the last twelve months, from US$1.2b to US$2.2b , which comprises of short- and long-term debt. With this rise in debt, 551’s cash and short-term investments stands at US$1.0b , ready to deploy into the business. Moreover, 551 has generated US$565m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 26%, signalling that 551’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 551’s case, it is able to generate 0.26x cash from its debt capital.
Can 551 pay its short-term liabilities?
With current liabilities at US$2.3b, it seems that the business has been able to meet these commitments with a current assets level of US$4.4b, leading to a 1.91x current account ratio. For Luxury 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.
Does 551 face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, 551 may be thought of as relatively highly levered. 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 551’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 551, the ratio of 8.39x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 551’s high interest coverage is seen as responsible and safe practice.
Although 551’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. I admit this is a fairly basic analysis for 551’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Yue Yuen Industrial (Holdings) to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 551’s future growth? Take a look at our free research report of analyst consensus for 551’s outlook.
- Valuation: What is 551 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 551 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 firstname.lastname@example.org.