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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Kingsoft Corporation Limited (HKG:3888), with a market cap of HK$16.1b, 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. Today we will look at 3888’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 3888 here.
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Does 3888 produce enough cash relative to debt?
Over the past year, 3888 has ramped up its debt from CN¥1.6b to CN¥3.8b – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥10.3b , ready to deploy into the business. Moreover, 3888 has generated CN¥1.1b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 30%, signalling that 3888’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 3888’s case, it is able to generate 0.3x cash from its debt capital.
Can 3888 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥3.9b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.21x. However, anything above 3x may be considered excessive by some investors. They might argue 3888 is leaving too much capital in low-earning investments.
Does 3888 face the risk of succumbing to its debt-load?
3888’s level of debt is appropriate relative to its total equity, at 29%. This range is considered safe as 3888 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
3888 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. 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 3888 has company-specific issues impacting its capital structure decisions. You should continue to research Kingsoft to get a better picture of the stock by looking at: