Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Xiaomi Corporation (HKG:1810). With a market valuation of HK$323b, 1810 is a safe haven in times of market uncertainty due to its strong balance sheet. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for 1810 to determine is solvency and liquidity and whether the stock is a sound investment.
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How much cash does 1810 generate through its operations?
1810’s debt levels have fallen from CN¥172b to CN¥9.9b over the last 12 months , which includes long-term debt. With this debt payback, 1810’s cash and short-term investments stands at CN¥45b , ready to deploy into the business. On top of this, 1810 has produced CN¥496m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 5.0%, signalling that 1810’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 1810’s case, it is able to generate 0.05x cash from its debt capital.
Can 1810 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥71b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. Usually, for Tech companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1810’s debt level acceptable?
With debt at 15% of equity, 1810 may be thought of as appropriately levered. This range is considered safe as 1810 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 1810’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Although 1810’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how 1810 has been performing in the past. I recommend you continue to research Xiaomi to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1810’s future growth? Take a look at our free research report of analyst consensus for 1810’s outlook.
- Valuation: What is 1810 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 1810 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.
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.