Stocks with market capitalization between $2B and $10B, such as Beijing Enterprises Holdings Limited (SEHK:392) with a size of HK$60.64B, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine 392’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 392 here. View our latest analysis for Beijing Enterprises Holdings

Does 392 generate enough cash through operations?

392 has built up its total debt levels in the last twelve months, from HK$34,755.6M to HK$50,629.1M – this includes both the current and long-term debt. With this rise in debt, 392 currently has HK$15,971.6M remaining in cash and short-term investments , ready to deploy into the business. Additionally, 392 has generated HK$11,963.5M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 23.63%, meaning that 392’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 392’s case, it is able to generate 0.24x cash from its debt capital.

Can 392 meet its short-term obligations with the cash in hand?

With current liabilities at HK$39,260.2M, it appears that the company has not been able to meet these commitments with a current assets level of HK$33,836.3M, leading to a 0.86x current account ratio. which is under the appropriate industry ratio of 3x.

Does 392 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 82.30%, 392 can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 392’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 392, the ratio of 2.59x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 392’s low interest coverage already puts the company at higher risk of default.

Next Steps:

392’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 392 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Beijing Enterprises Holdings to get a more holistic view of the stock by looking at: