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Mid-caps stocks, like Dongfeng Motor Group Company Limited (HKG:489) with a market capitalization of HK$71b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at 489’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 489 here.
See our latest analysis for Dongfeng Motor Group
How much cash does 489 generate through its operations?
489’s debt levels surged from CN¥14b to CN¥18b over the last 12 months , which accounts for long term debt. With this rise in debt, 489’s cash and short-term investments stands at CN¥35b , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 489’s operating efficiency ratios such as ROA here.
Can 489 pay its short-term liabilities?
Looking at 489’s CN¥89b in current liabilities, the company has been able to meet these commitments with a current assets level of CN¥110b, leading to a 1.23x current account ratio. Generally, for Auto 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.
Does 489 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 15%, 489’s debt level may be seen as prudent. 489 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 489 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 489’s, case, the ratio of 1.67x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.