Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Weichai Power Co., Ltd. (HKG:2338), with a market capitalization of HK$70b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine 2338’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 Weichai Power’s financial health, so you should conduct further analysis into 2338 here.

View our latest analysis for Weichai Power

Does 2338 produce enough cash relative to debt?

2338’s debt levels have fallen from CN¥45b to CN¥41b over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥33b for investing into the business. On top of this, 2338 has produced CN¥17b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 41%, signalling that 2338’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2338’s case, it is able to generate 0.41x cash from its debt capital.

Does 2338’s liquid assets cover its short-term commitments?

With current liabilities at CN¥83b, the company has been able to meet these obligations given the level of current assets of CN¥105b, with a current ratio of 1.27x. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Is 2338’s debt level acceptable?

With a debt-to-equity ratio of 69%, 2338 can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

Although 2338’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 2338 has been performing in the past. I suggest you continue to research Weichai Power to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2338’s future growth? Take a look at our free research report of analyst consensus for 2338’s outlook.

2. Valuation: What is 2338 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 2338 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.