Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Huaneng Power International Inc (SEHK:902) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. Today we will look at Huaneng Power International’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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into 902 here. Check out our latest analysis for Huaneng Power International
How much cash does 902 generate through its operations?
902 has built up its total debt levels in the last twelve months, from CN¥224.35B to CN¥238.16B , which comprises of short- and long-term debt. With this increase in debt, 902’s cash and short-term investments stands at CN¥9.36B , ready to deploy into the business. On top of this, 902 has produced CN¥29.20B in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12.26%, signalling that 902’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 902’s case, it is able to generate 0.12x cash from its debt capital.
Can 902 meet its short-term obligations with the cash in hand?
Looking at 902’s most recent CN¥155.95B liabilities, the company has not been able to meet these commitments with a current assets level of CN¥48.54B, leading to a 0.31x current account ratio. which is under the appropriate industry ratio of 3x.
Does 902 face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Huaneng Power International is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if 902’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 902’s case, the ratio of 1.71x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Huaneng Power International defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.
With a high level of debt on its balance sheet, 902 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 902 to increase its operational efficiency. In addition to this, 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 902’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Huaneng Power International to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 902’s future growth? Take a look at our free research report of analyst consensus for 902’s outlook.
- Valuation: What is 902 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 902 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 pass 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.