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 HK$49b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. 1528’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 1528 here.
1528’s Debt (And Cash Flows)
Over the past year, 1528 has ramped up its debt from CN¥29b to CN¥37b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥8.8b to keep the business going. On top of this, 1528 has generated cash from operations of CN¥5.9b in the last twelve months, resulting in an operating cash to total debt ratio of 16%, signalling that 1528’s current level of operating cash is not high enough to cover debt.
Can 1528 pay its short-term liabilities?
At the current liabilities level of CN¥25b, the company may not be able to easily meet these obligations given the level of current assets of CN¥16b, with a current ratio of 0.62x. The current ratio is calculated by dividing current assets by current liabilities.
Does 1528 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 82%, 1528 can be considered as an above-average leveraged company. 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 4.95x 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.
Although 1528’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure 1528 has company-specific issues impacting its capital structure decisions. I recommend 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.
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