Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Sun Art Retail Group Limited (SEHK:6808) with a market capitalization of HK$77.56B, 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. Check out our latest analysis for Sun Art Retail Group
Can 6808 service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For Sun Art Retail Group, investors should not worry about its debt levels because the company has very, very little on its balance sheet! It has been operating its business with miniscule debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with 6808, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can 6808 meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare 6808’s cash and other liquid assets against its upcoming debt. Our analysis shows that 6808 is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? 6808’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Given that 6808’s capital structure may be different in the future, You should continue assessing market expectations for 6808’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. 6808’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.