Stocks with market capitalization between $2B and $10B, such as China Traditional Chinese Medicine Holdings Co Limited (HKG:570) with a size of HK$36.51b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at 570’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 570 here. View out our latest analysis for China Traditional Chinese Medicine Holdings
How much cash does 570 generate through its operations?
Over the past year, 570 has ramped up its debt from HK$3.91b to HK$5.15b – this includes both the current and long-term debt. With this rise in debt, 570 currently has HK$4.93b remaining in cash and short-term investments for investing into the business. Moreover, 570 has generated cash from operations of HK$1.24b in the last twelve months, resulting in an operating cash to total debt ratio of 23.98%, indicating that 570’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 570’s case, it is able to generate 0.24x cash from its debt capital.
Can 570 pay its short-term liabilities?
Looking at 570’s most recent HK$4.69b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$11.38b, with a current ratio of 2.42x. For Pharmaceuticals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 570 face the risk of succumbing to its debt-load?
With debt at 37.30% of equity, 570 may be thought of as appropriately levered. This range is considered safe as 570 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 570 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 570’s, case, the ratio of 9.31x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 570 ample headroom to grow its debt facilities.
570’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 570 has been performing in the past. I suggest you continue to research China Traditional Chinese Medicine Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 570’s future growth? Take a look at our free research report of analyst consensus for 570’s outlook.
- Valuation: What is 570 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 570 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.