Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Red Star Macalline Group Corporation Ltd (HKG:1528), with a market cap of CN¥33.41b, often get neglected by retail investors. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at 1528’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Red Star Macalline Group’s financial health, so you should conduct further analysis into 1528 here.
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How does 1528’s operating cash flow stack up against its debt?
Over the past year, 1528 has borrowed debt capital of around CN¥29.87b comprising of short- and long-term debt. With this ramp up in debt, 1528 currently has CN¥11.61b remaining in cash and short-term investments for investing into the business. Moreover, 1528 has produced CN¥5.77b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 19.31%, indicating that 1528’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1528’s case, it is able to generate 0.19x cash from its debt capital.
Can 1528 pay its short-term liabilities?
Looking at 1528’s most recent CN¥23.01b liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CN¥16.68b, leading to a 0.72x current account ratio. which is under the appropriate industry ratio of 3x.
Is 1528’s debt level acceptable?
1528 is a relatively highly levered company with a debt-to-equity of 62.28%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1528’s case, the ratio of 9.04x suggests that interest is appropriately 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:
1528’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for 1528’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Red Star Macalline Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1528’s future growth? Take a look at our free research report of analyst consensus for 1528’s outlook.
- Historical Performance: What has 1528’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.
- 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 pass 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.