Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as China Coal Energy Company Limited (HKG:1898), with a market cap of HK$69b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at 1898’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 1898 here.
Does 1898 Produce Much Cash Relative To Its Debt?
Over the past year, 1898 has maintained its debt levels at around CN¥97b – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at CN¥24b to keep the business going. On top of this, 1898 has produced CN¥20b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 21%, meaning that 1898’s operating cash is sufficient to cover its debt.
Can 1898 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥69b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.8x. The current ratio is calculated by dividing current assets by current liabilities.
Can 1898 service its debt comfortably?
1898 is a relatively highly levered company with a debt-to-equity of 88%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1898's case, the ratio of 6.57x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although 1898’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure 1898 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Coal Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1898’s future growth? Take a look at our free research report of analyst consensus for 1898’s outlook.
- Valuation: What is 1898 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 1898 is currently mispriced by the market.
- 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.
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