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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as China Communications Construction Company Limited (HKG:1800) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. Let’s take a look at China Communications Construction’s leverage and assess its financial strength 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 high-level overview, so I encourage you to look further into 1800 here.
1800’s Debt (And Cash Flows)
Over the past year, 1800 has ramped up its debt from CN¥273b to CN¥294b , which accounts for long term debt. With this increase in debt, 1800's cash and short-term investments stands at CN¥106b , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1800’s operating efficiency ratios such as ROA here.
Can 1800 pay its short-term liabilities?
With current liabilities at CN¥467b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. The current ratio is calculated by dividing current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1800 face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, China Communications Construction 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of 1800’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1800's case, the ratio of 6.81x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 1800 and other large-cap investments thought to be safe.
At its current level of cash flow coverage, 1800 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, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for 1800's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Communications Construction to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1800’s future growth? Take a look at our free research report of analyst consensus for 1800’s outlook.
- Valuation: What is 1800 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 1800 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.