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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Vinda International Holdings Limited (HKG:3331), with a market capitalization of HK$16.05b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine 3331’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 3331 here.
See our latest analysis for Vinda International Holdings
Does 3331 produce enough cash relative to debt?
3331’s debt levels surged from HK$4.97b to HK$5.81b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$491.3m , ready to deploy into the business. Additionally, 3331 has produced cash from operations of HK$393.8m during the same period of time, resulting in an operating cash to total debt ratio of 6.8%, signalling that 3331’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 3331’s case, it is able to generate 0.068x cash from its debt capital.
Can 3331 meet its short-term obligations with the cash in hand?
Looking at 3331’s most recent HK$6.00b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$6.20b, with a current ratio of 1.03x. Generally, for Household Products companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 3331 service its debt comfortably?
With debt reaching 65.2% of equity, 3331 may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 3331 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 3331’s, case, the ratio of 5.53x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 3331’s high interest coverage is seen as responsible and safe practice.