Is ENN Energy Holdings Limited (HKG:2688) A Financially Sound Company?
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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as ENN Energy Holdings Limited (HKG:2688) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. This article will examine ENN Energy Holdings’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 2688 here.
View our latest analysis for ENN Energy Holdings
Does 2688 produce enough cash relative to debt?
Over the past year, 2688 has reduced its debt from CN¥19b to CN¥17b , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥6.4b for investing into the business. Additionally, 2688 has generated CN¥6.5b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 38%, signalling that 2688’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2688’s case, it is able to generate 0.38x cash from its debt capital.
Does 2688’s liquid assets cover its short-term commitments?
With current liabilities at CN¥26b, the company may not have an easy time meeting these commitments with a current assets level of CN¥17b, leading to a current ratio of 0.65x.
Does 2688 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 80%, 2688 can be considered as an above-average leveraged company. 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For 2688, the ratio of 161x suggests that interest is comfortably covered. Large-cap investments like 2688 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
2688’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for 2688’s financial health. Other important fundamentals need to be considered alongside. You should continue to research ENN Energy Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 2688’s future growth? Take a look at our free research report of analyst consensus for 2688’s outlook.
Valuation: What is 2688 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 2688 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.
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.
