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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Zhongsheng Group Holdings Limited (HKG:881), with a market cap of HK$34.8b, often get neglected by retail investors. 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. Let’s take a look at 881’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 881 here.
Check out our latest analysis for Zhongsheng Group Holdings
Does 881 produce enough cash relative to debt?
881 has built up its total debt levels in the last twelve months, from CN¥18.6b to CN¥26.3b , which is made up of current and long term debt. With this increase in debt, 881 currently has CN¥6.9b remaining in cash and short-term investments for investing into the business. On top of this, 881 has produced cash from operations of CN¥4.4b in the last twelve months, leading to an operating cash to total debt ratio of 17%, indicating that 881’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 881’s case, it is able to generate 0.17x cash from its debt capital.
Can 881 pay its short-term liabilities?
With current liabilities at CN¥28.2b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. Generally, for Specialty Retail 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 881 service its debt comfortably?
With total debt exceeding equities, 881 is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 881’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 881, the ratio of 5.89x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 881 ample headroom to grow its debt facilities.
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At its current level of cash flow coverage, 881 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 881 has been performing in the past. I suggest you continue to research Zhongsheng Group Holdings to get a more holistic view of the stock by looking at: