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Is Aluminum Corporation of China Limited’s (HKG:2600) Balance Sheet Strong Enough To Weather A Storm?

Kelly Murphy

There are a number of reasons that attract investors towards large-cap companies such as Aluminum Corporation of China Limited (SEHK:2600), with a market cap of HK$81.41B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Today we will look at Aluminum of China’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into 2600 here. See our latest analysis for Aluminum of China

How much cash does 2600 generate through its operations?

2600 has sustained its debt level by about CN¥103.04B over the last 12 months made up of current and long term debt. At this constant level of debt, 2600’s cash and short-term investments stands at CN¥29.91B for investing into the business. On top of this, 2600 has generated CN¥13.13B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 12.74%, signalling that 2600’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 2600’s case, it is able to generate 0.13x cash from its debt capital.

Can 2600 pay its short-term liabilities?

At the current liabilities level of CN¥89.98B liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CN¥68.35B, leading to a 0.76x current account ratio. which is under the appropriate industry ratio of 3x.

SEHK:2600 Historical Debt May 2nd 18

Is 2600’s debt level acceptable?

Since equity is smaller than total debt levels, Aluminum of China is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether 2600 is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For 2600, the ratio of 2.01x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Aluminum of China defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.

Next Steps:

With a high level of debt on its balance sheet, 2600 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 2600 to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure 2600 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aluminum of China to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2600’s future growth? Take a look at our free research report of analyst consensus for 2600’s outlook.
  2. Valuation: What is 2600 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 2600 is currently mispriced by the market.
  3. 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.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.