Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Yuexiu Property Company Limited (SEHK:123) with a market-capitalization of HK$19.59B, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. 123’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 123 here. See our latest analysis for Yuexiu Property
Does 123 generate an acceptable amount of cash through operations?
123’s debt levels surged from CN¥38,164.9M to CN¥41,326.0M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥17,691.4M , ready to deploy into the business. On top of this, 123 has produced cash from operations of CN¥5,152.7M over the same time period, leading to an operating cash to total debt ratio of 12.47%, meaning that 123’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 123’s case, it is able to generate 0.12x cash from its debt capital.
Can 123 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥52,926.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥92,323.2M, with a current ratio of 1.74x. Generally, for Real Estate companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 123 face the risk of succumbing to its debt-load?
With total debt exceeding equities, 123 is considered a highly levered 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 123’s case, the ratio of 4.93x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.