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Stocks with market capitalization between $2B and $10B, such as Legend Holdings Corporation (HKG:3396) with a size of HK$49b, 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. Let’s take a look at 3396’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 3396 here.
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Does 3396 produce enough cash relative to debt?
Over the past year, 3396 has ramped up its debt from CN¥91b to CN¥115b , which includes long-term debt. With this increase in debt, 3396 currently has CN¥57b remaining in cash and short-term investments for investing into the business. Moreover, 3396 has generated CN¥1.7b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.5%, indicating that 3396’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 3396’s case, it is able to generate 0.015x cash from its debt capital.
Can 3396 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥208b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.96x.
Is 3396’s debt level acceptable?
Since total debt levels have outpaced equities, 3396 is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
Although 3396’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 3396 has been performing in the past. I recommend you continue to research Legend Holdings to get a better picture of the stock by looking at: