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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Hutchison China MediTech Limited (LON:HCM), with a market cap of UK£2.9b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine HCM’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HCM here.
View our latest analysis for Hutchison China MediTech
HCM’s Debt (And Cash Flows)
Over the past year, HCM has reduced its debt from US$33m to US$28m – this includes long-term debt. With this reduction in debt, HCM's cash and short-term investments stands at US$301m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. 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 HCM’s operating efficiency ratios such as ROA here.
Does HCM’s liquid assets cover its short-term commitments?
At the current liabilities level of US$85m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.33x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high.
Is HCM’s debt level acceptable?
With debt at 6.7% of equity, HCM may be thought of as having low leverage. HCM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors' risk associated with debt is virtually non-existent with HCM, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
HCM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, 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 HCM's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hutchison China MediTech to get a better picture of the stock by looking at: