Stocks with market capitalization between $2B and $10B, such as Health and Happiness (H&H) International Holdings Limited (HKG:1112) with a size of HK$30.09b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at 1112’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 1112 here.

Check out our latest analysis for Health and Happiness (H&H) International Holdings

Does 1112 produce enough cash relative to debt?

1112’s debt levels have fallen from CN¥6.76b to CN¥5.93b over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥1.99b for investing into the business. On top of this, 1112 has produced CN¥1.89b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 31.9%, meaning that 1112’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1112’s case, it is able to generate 0.32x cash from its debt capital.

Can 1112 meet its short-term obligations with the cash in hand?

Looking at 1112’s most recent CN¥2.66b liabilities, the company has been able to meet these commitments with a current assets level of CN¥4.17b, leading to a 1.57x current account ratio. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

Is 1112’s debt level acceptable?

1112 is a highly-leveraged company with debt exceeding equity by over 100%. 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 1112’s case, the ratio of 6.22x 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.

Next Steps:

Although 1112’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 1112 has been performing in the past. I suggest you continue to research Health and Happiness (H&H) International Holdings to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1112’s future growth? Take a look at our free research report of analyst consensus for 1112’s outlook.

2. Valuation: What is 1112 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 1112 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.