Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Kingdee International Software Group Company Limited (HKG:268) with a market-capitalization of HK$24.6b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at 268’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 268 here.

View our latest analysis for Kingdee International Software Group

How much cash does 268 generate through its operations?

268 has shrunken its total debt levels in the last twelve months, from CN¥1.4b to CN¥224m – this includes both the current and long-term debt. With this debt repayment, 268 currently has CN¥2.4b remaining in cash and short-term investments for investing into the business. On top of this, 268 has produced CN¥858m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 383%, signalling that 268’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 268’s case, it is able to generate 3.83x cash from its debt capital.

Can 268 meet its short-term obligations with the cash in hand?

Looking at 268’s most recent CN¥1.5b liabilities, the company has been able to meet these commitments with a current assets level of CN¥3.5b, leading to a 2.36x current account ratio. For Software 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.

Does 268 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 4.2%, 268’s debt level is relatively low. This range is considered safe as 268 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.

Next Steps:

268’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 268 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Kingdee International Software Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 268’s future growth? Take a look at our free research report of analyst consensus for 268’s outlook.

2. Valuation: What is 268 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 268 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.