Does Hengan International Group Company Limited’s (HKG:1044) Debt Level Pose A Problem?

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Hengan International Group Company Limited (HKG:1044) with a market-capitalization of HK$77b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine 1044’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Hengan International Group’s financial health, so you should conduct further analysis into 1044 here.

View our latest analysis for Hengan International Group

How does 1044’s operating cash flow stack up against its debt?

1044 has shrunken its total debt levels in the last twelve months, from CN¥20b to CN¥18b , which also accounts for long term debt. With this debt payback, 1044’s cash and short-term investments stands at CN¥18b for investing into the business. On top of this, 1044 has produced cash from operations of CN¥3.8b in the last twelve months, resulting in an operating cash to total debt ratio of 21%, indicating that 1044’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1044’s case, it is able to generate 0.21x cash from its debt capital.

Does 1044’s liquid assets cover its short-term commitments?

With current liabilities at CN¥18b, it appears that the company has been able to meet these commitments with a current assets level of CN¥26b, leading to a 1.42x current account ratio. Generally, for Personal Products companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:1044 Historical Debt December 1st 18
SEHK:1044 Historical Debt December 1st 18

Can 1044 service its debt comfortably?

With total debt exceeding equities, 1044 is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

Although 1044’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 1044’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hengan International Group to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1044’s future growth? Take a look at our free research report of analyst consensus for 1044’s outlook.
  2. Valuation: What is 1044 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 1044 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.

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 editorial-team@simplywallst.com.