In This Article:
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Lenovo Group Limited (HKG:992), with a market cap of HK$66b, are often out of the spotlight. 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 992’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 992 here.
See our latest analysis for Lenovo Group
How does 992’s operating cash flow stack up against its debt?
992’s debt levels surged from US$2.7b to US$4.5b over the last 12 months , which includes long-term debt. With this rise in debt, 992 currently has US$2.3b remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 992’s operating efficiency ratios such as ROA here.
Does 992’s liquid assets cover its short-term commitments?
Looking at 992’s US$23b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x.
Does 992 face the risk of succumbing to its debt-load?
992 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since 992 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although 992’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. This is only a rough assessment of financial health, and I’m sure 992 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Lenovo Group to get a better picture of the stock by looking at: