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Mid-caps stocks, like Want Want China Holdings Limited (HKG:151) with a market capitalization of HK$69.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at 151’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 151 here.
Check out our latest analysis for Want Want China Holdings
How does 151’s operating cash flow stack up against its debt?
151 has shrunken its total debt levels in the last twelve months, from CN¥8.7b to CN¥6.9b – this includes both the current and long-term debt. With this reduction in debt, 151 currently has CN¥13.0b remaining in cash and short-term investments for investing into the business. Additionally, 151 has generated cash from operations of CN¥4.3b over the same time period, resulting in an operating cash to total debt ratio of 62%, signalling that 151’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 151’s case, it is able to generate 0.62x cash from its debt capital.
Can 151 pay its short-term liabilities?
At the current liabilities level of CN¥8.7b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.99x. For Food companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 151’s debt level acceptable?
151 is a relatively highly levered company with a debt-to-equity of 47%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
151’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 151’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 151 has been performing in the past. I suggest you continue to research Want Want China Holdings to get a better picture of the mid-cap by looking at: