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Stocks with market capitalization between $2B and $10B, such as SOHO China Limited (HKG:410) with a size of HK$17b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at 410’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 410 here.
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How much cash does 410 generate through its operations?
410’s debt level has been constant at around CN¥19b over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at CN¥3.3b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 410’s operating efficiency ratios such as ROA here.
Does 410’s liquid assets cover its short-term commitments?
Looking at 410’s CN¥9.5b in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.75x.
Does 410 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 54%, 410 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. We can test if 410’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 410, the ratio of 2.3x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
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Although 410’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven’t considered other factors such as how 410 has been performing in the past. I suggest you continue to research SOHO China to get a more holistic view of the stock by looking at: