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COSCO SHIPPING Ports Limited (HKG:1199): Time For A Financial Health Check

Simply Wall St

Investors are always looking for growth in small-cap stocks like COSCO SHIPPING Ports Limited (HKG:1199), with a market cap of HK$27b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into 1199 here.

Does 1199 Produce Much Cash Relative To Its Debt?

1199's debt level has been constant at around US$2.7b over the previous year – this includes long-term debt. At this stable level of debt, 1199's cash and short-term investments stands at US$552m , ready to be used for running the business. Moreover, 1199 has generated US$266m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.9%, meaning that 1199’s debt is not covered by operating cash.

Can 1199 pay its short-term liabilities?

With current liabilities at US$781m, it seems that the business has been able to meet these commitments with a current assets level of US$856m, leading to a 1.1x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Infrastructure companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

SEHK:1199 Historical Debt, April 26th 2019

Does 1199 face the risk of succumbing to its debt-load?

With debt reaching 46% of equity, 1199 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1199’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1199, the ratio of 3.36x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 1199’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although 1199’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 1199's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 1199 has company-specific issues impacting its capital structure decisions. I suggest you continue to research COSCO SHIPPING Ports to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1199’s future growth? Take a look at our free research report of analyst consensus for 1199’s outlook.
  2. Valuation: What is 1199 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 1199 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.