Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Landing International Development Limited (SEHK:582) with a market capitalization of HK$46.43B, rarely draw their attention from analysts and investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for 582
Can 582 service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. 582’s debt-to-equity ratio stands at 1.85%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. In 582’s case, its interest is excessively covered by its earnings as the ratio sits at 16.44x. Lenders may be less hesitant to lend out more funding as 582’s high interest coverage is seen as responsible and safe practice.
Can 582 pay its short-term liabilities?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare 582’s cash and other liquid assets against its upcoming debt. Our analysis shows that 582 does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? 582’s low debt is also met with low coverage. Investors should ask themselves if they believe 582 still has room for improvement in terms of its operating efficiency given cash flow currently covers less than a quarter of its borrowings. Since 582’s financial position may change, I encourage assessing market expectations for 582’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. 582’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.