Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Xinyi Solar Holdings Limited (HKG:968), with a market cap of HK$34b, are often out of the spotlight. 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 968’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 968 here.
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Does 968 Produce Much Cash Relative To Its Debt?
968 has built up its total debt levels in the last twelve months, from HK$7.9b to HK$8.8b , which accounts for long term debt. With this increase in debt, 968’s cash and short-term investments stands at HK$981m , ready to be used for running the business. On top of this, 968 has produced HK$2.3b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, indicating that 968’s operating cash is sufficient to cover its debt.
Does 968’s liquid assets cover its short-term commitments?
With current liabilities at HK$6.7b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Semiconductor companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 968 service its debt comfortably?
968 is a relatively highly levered company with a debt-to-equity of 73%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 968’s case, the ratio of 9.95x 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.
Next Steps:
Although 968’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. This is only a rough assessment of financial health, and I’m sure 968 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Xinyi Solar Holdings to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 968’s future growth? Take a look at our free research report of analyst consensus for 968’s outlook.
- Valuation: What is 968 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 968 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.
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