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Mid-caps stocks, like GDS Holdings Limited (NASDAQ:GDS) with a market capitalization of US$4.8b, 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. This article will examine GDS’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into GDS here.
GDS’s Debt (And Cash Flows)
Over the past year, GDS has ramped up its debt from CN¥7.6b to CN¥14b , which accounts for long term debt. With this growth in debt, GDS currently has CN¥6.0b remaining in cash and short-term investments to keep the business going. Additionally, GDS has produced cash from operations of CN¥71m over the same time period, resulting in an operating cash to total debt ratio of 0.5%, signalling that GDS’s current level of operating cash is not high enough to cover debt.
Can GDS pay its short-term liabilities?
With current liabilities at CN¥3.2b, it appears that the company has been able to meet these commitments with a current assets level of CN¥7.1b, leading to a 2.22x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For IT companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can GDS service its debt comfortably?
GDS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since GDS is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although GDS’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. Since there is also no concerns around GDS's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how GDS has been performing in the past. I suggest you continue to research GDS Holdings to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GDS’s future growth? Take a look at our free research report of analyst consensus for GDS’s outlook.
- Valuation: What is GDS 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 GDS 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 email@example.com. 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.