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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as China Energy Engineering Corporation Limited (HKG:3996), with a market cap of CN¥28.82b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at 3996’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 3996 here.
See our latest analysis for China Energy Engineering
How does 3996’s operating cash flow stack up against its debt?
3996’s debt levels surged from CN¥65.38b to CN¥76.07b over the last 12 months , which is made up of current and long term debt. With this rise in debt, 3996’s cash and short-term investments stands at CN¥42.03b for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 3996’s operating efficiency ratios such as ROA here.
Can 3996 pay its short-term liabilities?
At the current liabilities level of CN¥187.20b liabilities, the company has been able to meet these commitments with a current assets level of CN¥241.86b, leading to a 1.29x current account ratio. For Construction companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 3996 service its debt comfortably?
With debt reaching 82.12% of equity, 3996 may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 3996’s case, the ratio of 5.78x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 3996 ample headroom to grow its debt facilities.