What Investors Should Know About China Mengniu Dairy Company Limited’s (HKG:2319) Financial Strength
Investors pursuing a solid, dependable stock investment can often be led to China Mengniu Dairy Company Limited (HKG:2319), a large-cap worth HK$92.69b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Today we will look at China Mengniu Dairy’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 2319 here.
View our latest analysis for China Mengniu Dairy
Does 2319 produce enough cash relative to debt?
2319 has built up its total debt levels in the last twelve months, from CN¥8.73b to CN¥14.01b – this includes both the current and long-term debt. With this growth in debt, 2319’s cash and short-term investments stands at CN¥15.37b , ready to deploy into the business. On top of this, 2319 has produced cash from operations of CN¥5.51b in the last twelve months, resulting in an operating cash to total debt ratio of 39.3%, signalling that 2319’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2319’s case, it is able to generate 0.39x cash from its debt capital.
Can 2319 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥22.57b, it appears that the company has been able to meet these obligations given the level of current assets of CN¥26.02b, with a current ratio of 1.15x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 2319’s debt level acceptable?
With a debt-to-equity ratio of 51.7%, 2319 can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies.
Next Steps:
Although 2319’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 2319’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 2319 has been performing in the past. I suggest you continue to research China Mengniu Dairy to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 2319’s future growth? Take a look at our free research report of analyst consensus for 2319’s outlook.
Valuation: What is 2319 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 2319 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.
