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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Chow Tai Fook Jewellery Group Limited (HKG:1929), with a market capitalization of HK$67.7b, 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. This article will examine 1929’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 1929 here.
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How much cash does 1929 generate through its operations?
Over the past year, 1929 has ramped up its debt from HK$10.0b to HK$13.3b – this includes both the current and long-term debt. With this rise in debt, 1929 currently has HK$8.6b remaining in cash and short-term investments , ready to deploy into the business. Moreover, 1929 has generated cash from operations of HK$2.9b over the same time period, leading to an operating cash to total debt ratio of 22%, indicating that 1929’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1929’s case, it is able to generate 0.22x cash from its debt capital.
Can 1929 pay its short-term liabilities?
At the current liabilities level of HK$20.7b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. Generally, for Specialty Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 1929 service its debt comfortably?
With a debt-to-equity ratio of 39%, 1929’s debt level may be seen as prudent. This range is considered safe as 1929 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 1929’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1929, the ratio of 32.39x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1929 ample headroom to grow its debt facilities.
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1929’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1929 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Chow Tai Fook Jewellery Group to get a more holistic view of the stock by looking at: