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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Guangshen Railway Company Limited (HKG:525), with a market capitalization of HK$28.0b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. 525’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 525 here.
Check out our latest analysis for Guangshen Railway
Can 525 service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For Guangshen Railway, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors’ risk associated with debt is virtually non-existent with 525, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can 525 meet its short-term obligations with the cash in hand?
Since Guangshen Railway doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of CN¥5.6b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. Generally, for Transportation companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
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525 has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, though, some level of debt may also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure 525 has company-specific issues impacting its capital structure decisions. You should continue to research Guangshen Railway to get a more holistic view of the stock by looking at: