What does Tianjin Jinran Public Utilities Company Limited’s (HKG:1265) Balance Sheet Tell Us About Its Future?
The direct benefit for Tianjin Jinran Public Utilities Company Limited (HKG:1265), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is 1265 will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 1265 has outstanding financial strength. I recommend you look at the following hurdles to assess 1265’s financial health.
View our latest analysis for Tianjin Jinran Public Utilities
Is 1265 growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. 1265’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A revenue growth in the teens is not considered high-growth. 1265’s revenue growth of 16.9% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can 1265 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Tianjin Jinran Public Utilities has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at CN¥817.0m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.09x. For Gas Utilities companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for 1265 to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. I admit this is a fairly basic analysis for 1265’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tianjin Jinran Public Utilities to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1265’s future growth? Take a look at our free research report of analyst consensus for 1265’s outlook.
Historical Performance: What has 1265’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
