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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like China Literature Limited (HKG:772), with a market cap of HK$38b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at 772’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. Don’t forget that this is a general and concentrated examination of China Literature's financial health, so you should conduct further analysis into 772 here.
772’s Debt (And Cash Flows)
Over the past year, 772 has ramped up its debt from CN¥475m to CN¥2.5b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥8.8b to keep the business going. On top of this, 772 has generated CN¥918m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 37%, indicating that 772’s current level of operating cash is high enough to cover debt.
Can 772 pay its short-term liabilities?
Looking at 772’s CN¥6.6b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥14b, with a current ratio of 2.16x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Media companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does 772 face the risk of succumbing to its debt-load?
With debt at 14% of equity, 772 may be thought of as appropriately levered. This range is considered safe as 772 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
772 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure 772 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Literature to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 772’s future growth? Take a look at our free research report of analyst consensus for 772’s outlook.
- Valuation: What is 772 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 772 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.