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Are China Mengniu Dairy Company Limited's (HKG:2319) Interest Costs Too High?

Simply Wall St

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Investors pursuing a solid, dependable stock investment can often be led to China Mengniu Dairy Company Limited (HKG:2319), a large-cap worth HK$119b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the health of the financials determines whether the company continues to succeed. This article will examine China Mengniu Dairy’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 high-level overview, so I encourage you to look further into 2319 here.

View our latest analysis for China Mengniu Dairy

2319’s Debt (And Cash Flows)

2319's debt levels surged from CN¥14b to CN¥15b over the last 12 months , which includes long-term debt. With this growth in debt, 2319 currently has CN¥17b remaining in cash and short-term investments , ready to be used for running the business. On top of this, 2319 has produced cash from operations of CN¥6.4b over the same time period, resulting in an operating cash to total debt ratio of 43%, indicating that 2319’s current level of operating cash is high enough to cover debt.

Does 2319’s liquid assets cover its short-term commitments?

Looking at 2319’s CN¥25b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥30b, leading to a 1.18x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Food 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.

SEHK:2319 Historical Debt, June 14th 2019

Is 2319’s debt level acceptable?

With a debt-to-equity ratio of 48%, 2319 can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies.

Next Steps:

2319’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 2319's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Mengniu Dairy to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2319’s future growth? Take a look at our free research report of analyst consensus for 2319’s outlook.
  2. Valuation: What is 2319 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 2319 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.

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 editorial-team@simplywallst.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.