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What Investors Should Know About Weichai Power Co., Ltd.’s (HKG:2338) Financial Strength

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Becky Mayes
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Weichai Power Co., Ltd. (HKG:2338), a large-cap worth HK$82b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to their continued success lies in its financial health. Today we will look at Weichai Power’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 2338 here.

See our latest analysis for Weichai Power

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How does 2338’s operating cash flow stack up against its debt?

2338’s debt levels have fallen from CN¥45b to CN¥41b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥33b , ready to deploy into the business. Moreover, 2338 has generated CN¥17b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 41%, indicating that 2338’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2338’s case, it is able to generate 0.41x cash from its debt capital.

Can 2338 meet its short-term obligations with the cash in hand?

At the current liabilities level of CN¥83b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥105b, with a current ratio of 1.27x. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:2338 Historical Debt January 31st 19
SEHK:2338 Historical Debt January 31st 19

Does 2338 face the risk of succumbing to its debt-load?

With debt reaching 69% of equity, 2338 may be thought of as relatively highly levered. 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.

Next Steps:

2338’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. Since there is also no concerns around 2338’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 2338 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Weichai Power to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2338’s future growth? Take a look at our free research report of analyst consensus for 2338’s outlook.

  2. Valuation: What is 2338 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 2338 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.

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.