Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like GDS Holdings Limited (NASDAQ:GDS), with a market cap of US$3.62B, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. GDS’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GDS here. See our latest analysis for GDS Holdings

Does GDS generate an acceptable amount of cash through operations?

Over the past year, GDS has ramped up its debt from CN¥4.29B to CN¥6.65B , which is made up of current and long term debt. With this growth in debt, GDS’s cash and short-term investments stands at CN¥1.87B , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of GDS’s operating efficiency ratios such as ROA here.

Can GDS pay its short-term liabilities?

Looking at GDS’s most recent CN¥2.42B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. Generally, for IT companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is GDS’s debt level acceptable?

GDS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since GDS is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

GDS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for GDS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research GDS Holdings to get a more holistic view of the stock by looking at: