A market capitalization of HK$103.03B puts Huaneng Power International Inc (SEHK:902) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Huaneng Power International
Is 902’s level of debt at an acceptable level?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. 902’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether 902’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. 902’s interest on debt is not strongly covered by earnings as it sits at around 1.15x. Debtors may be less inclined to loan the company more money, giving 902 less headroom for growth through debt.
How does 902’s operating cash flow stack up against its debt?
A basic way to evaluate 902’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses 902’s debt repayment capacity, which is not a big concern for a large company. Last year, 902’s operating cash flow was 0.09x its current debt. This is concerning as its incoming cash can pay off less than a tenth of what the company must return in the near term.
Are you a shareholder? 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 so investors should ask themselves if they believe 902 can sustainably increase its operational efficiency going forward. Since 902’s financial situation may change, I suggest examining market expectations for 902’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. That’s why I recommend potential investors to assess 902’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.