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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Hang Lung Group Limited (HKG:10) with a market-capitalization of HK$29.75b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at 10’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 10 here.
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Does 10 produce enough cash relative to debt?
10’s debt levels surged from HK$27.25b to HK$28.99b over the last 12 months – this includes both the current and long-term debt. With this increase in debt, 10’s cash and short-term investments stands at HK$15.01b 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 10’s operating efficiency ratios such as ROA here.
Can 10 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$11.93b liabilities, the company has been able to meet these commitments with a current assets level of HK$18.09b, leading to a 1.52x current account ratio. For Real Estate companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 10 service its debt comfortably?
With a debt-to-equity ratio of 19.20%, 10’s debt level may be seen as prudent. This range is considered safe as 10 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 10’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 10, the ratio of 11.25x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 10 ample headroom to grow its debt facilities.
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10’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 10’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hang Lung Group to get a better picture of the stock by looking at: