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How Financially Strong Is Sands China Ltd. (HKG:1928)?

There are a number of reasons that attract investors towards large-cap companies such as Sands China Ltd. (HKG:1928), with a market cap of HK$307b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. Today we will look at Sands China’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 1928 here.

See our latest analysis for Sands China

Does 1928 Produce Much Cash Relative To Its Debt?

1928’s debt levels surged from US$4.4b to US$5.6b over the last 12 months , which accounts for long term debt. With this rise in debt, 1928 currently has US$2.7b remaining in cash and short-term investments to keep the business going. Additionally, 1928 has generated cash from operations of US$3.0b over the same time period, leading to an operating cash to total debt ratio of 55%, meaning that 1928’s operating cash is sufficient to cover its debt.

Can 1928 meet its short-term obligations with the cash in hand?

Looking at 1928’s US$1.9b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$3.2b, with a current ratio of 1.64x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Hospitality companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:1928 Historical Debt, March 13th 2019
SEHK:1928 Historical Debt, March 13th 2019

Can 1928 service its debt comfortably?

Since equity is smaller than total debt levels, Sands China is considered to have high leverage. 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. By measuring how many times 1928’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For 1928, the ratio of 11.47x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as 1928 is a safe investment.

Next Steps:

Although 1928’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 1928’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 1928 has been performing in the past. You should continue to research Sands China to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1928’s future growth? Take a look at our free research report of analyst consensus for 1928’s outlook.

  2. Valuation: What is 1928 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 1928 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.

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