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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Zhongsheng Group Holdings Limited (SEHK:881), with a market cap of HK$53.84B, 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. Let’s take a look at 881’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 881 here. Check out our latest analysis for Zhongsheng Group Holdings
Does 881 generate an acceptable amount of cash through operations?
Over the past year, 881 has ramped up its debt from CN¥18.03B to CN¥21.21B – this includes both the current and long-term debt. With this growth in debt, 881’s cash and short-term investments stands at CN¥5.40B for investing into the business. On top of this, 881 has generated CN¥5.23B in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24.68%, signalling that 881’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 881’s case, it is able to generate 0.25x cash from its debt capital.
Can 881 pay its short-term liabilities?
With current liabilities at CN¥26.74B, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.9x, which is below the prudent industry ratio of 3x.
Can 881 service its debt comfortably?
Since total debt levels have outpaced equities, 881 is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In 881’s case, the ratio of 5.66x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 881 ample headroom to grow its debt facilities.
Next Steps:
881’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure 881 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Zhongsheng Group Holdings to get a more holistic view of the stock by looking at: