Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Hengan International Group Company Limited (HKG:1044), with a market capitalization of HK$63b, 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. 1044’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Hengan International Group’s financial health, so you should conduct further analysis into 1044 here.

Check out our latest analysis for Hengan International Group

Does 1044 produce enough cash relative to debt?

1044 has shrunken its total debt levels in the last twelve months, from CN¥20b to CN¥18b – this includes long-term debt. With this debt repayment, 1044’s cash and short-term investments stands at CN¥18b for investing into the business. On top of this, 1044 has generated cash from operations of CN¥3.8b in the last twelve months, leading to an operating cash to total debt ratio of 21%, signalling that 1044’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1044’s case, it is able to generate 0.21x cash from its debt capital.

Can 1044 pay its short-term liabilities?

At the current liabilities level of CN¥18b, it appears that the company has been able to meet these commitments with a current assets level of CN¥26b, leading to a 1.42x current account ratio. Usually, for Personal Products companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Does 1044 face the risk of succumbing to its debt-load?

With total debt exceeding equities, 1044 is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

Although 1044’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 1044’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1044 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hengan International Group to get a better picture of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1044’s future growth? Take a look at our free research report of analyst consensus for 1044’s outlook.

2. Valuation: What is 1044 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1044 is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.