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Does COSCO SHIPPING Ports Limited’s (HKG:1199) Debt Level Pose A Problem?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as COSCO SHIPPING Ports Limited (HKG:1199), with a market cap of HK$25.4b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at 1199’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. Don’t forget that this is a general and concentrated examination of COSCO SHIPPING Ports’s financial health, so you should conduct further analysis into 1199 here.

See our latest analysis for COSCO SHIPPING Ports

How does 1199’s operating cash flow stack up against its debt?

1199 has built up its total debt levels in the last twelve months, from US$1.7b to US$2.6b , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$582m , ready to deploy into the business. Additionally, 1199 has produced US$268m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10%, meaning that 1199’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1199’s case, it is able to generate 0.1x cash from its debt capital.

Does 1199’s liquid assets cover its short-term commitments?

At the current liabilities level of US$690m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Infrastructure 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:1199 Historical Debt October 11th 18

Is 1199’s debt level acceptable?

With a debt-to-equity ratio of 44%, 1199 can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 2.89x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

1199’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 1199 has company-specific issues impacting its capital structure decisions. You should continue to research COSCO SHIPPING Ports to get a more holistic view of the stock 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.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.