Is Lee and Man Paper Manufacturing Limited's (HKG:2314) Balance Sheet A Threat To Its Future?

Mid-caps stocks, like Lee and Man Paper Manufacturing Limited (HKG:2314) with a market capitalization of HK$29b, 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 2314’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 2314 here.

View our latest analysis for Lee and Man Paper Manufacturing

Does 2314 produce enough cash relative to debt?

2314 has built up its total debt levels in the last twelve months, from HK$14b to HK$16b , which accounts for long term debt. With this rise in debt, 2314 currently has HK$1.5b remaining in cash and short-term investments for investing into the business. Moreover, 2314 has generated HK$3.9b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, signalling that 2314’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2314’s case, it is able to generate 0.24x cash from its debt capital.

Can 2314 meet its short-term obligations with the cash in hand?

With current liabilities at HK$12b, it seems that the business has been able to meet these obligations given the level of current assets of HK$16b, with a current ratio of 1.31x. Usually, for Forestry companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does 2314 face the risk of succumbing to its debt-load?

With debt reaching 65% of equity, 2314 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. We can check to see whether 2314 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2314's, case, the ratio of 33.45x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although 2314’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. Since there is also no concerns around 2314's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 2314's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Lee and Man Paper Manufacturing to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2314’s future growth? Take a look at our free research report of analyst consensus for 2314’s outlook.
2. Valuation: What is 2314 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 2314 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.