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Mid-caps stocks, like Luye Pharma Group Ltd. (HKG:2186) with a market capitalization of HK$20b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine 2186’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. Don’t forget that this is a general and concentrated examination of Luye Pharma Group’s financial health, so you should conduct further analysis into 2186 here.
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2186’s Debt (And Cash Flows)
2186 has built up its total debt levels in the last twelve months, from CN¥2.9b to CN¥6.1b , which includes long-term debt. With this growth in debt, 2186's cash and short-term investments stands at CN¥3.5b to keep the business going. Moreover, 2186 has generated CN¥1.0b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 17%, meaning that 2186’s current level of operating cash is not high enough to cover debt.
Can 2186 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥8.2b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.06x. The current ratio is calculated by dividing current assets by current liabilities. For Pharmaceuticals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 2186 service its debt comfortably?
With debt reaching 77% of equity, 2186 may be thought of as relatively highly levered. 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 2186's case, the ratio of 21.06x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 2186’s high interest coverage is seen as responsible and safe practice.