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Are Jardine Cycle & Carriage Limited's (SGX:C07) Interest Costs Too High?

Simply Wall St

There are a number of reasons that attract investors towards large-cap companies such as Jardine Cycle & Carriage Limited (SGX:C07), with a market cap of S$13b. 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. However, the key to their continued success lies in its financial health. This article will examine Jardine Cycle & Carriage’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into C07 here.

View our latest analysis for Jardine Cycle & Carriage

C07’s Debt (And Cash Flows)

Over the past year, C07 has ramped up its debt from US$6.9b to US$7.4b , which accounts for long term debt. With this growth in debt, C07 currently has US$1.8b remaining in cash and short-term investments , ready to be used for running the business. On top of this, C07 has produced cash from operations of US$2.0b over the same time period, resulting in an operating cash to total debt ratio of 27%, indicating that C07’s current level of operating cash is high enough to cover debt.

Does C07’s liquid assets cover its short-term commitments?

Looking at C07’s US$9.8b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$10b, with a current ratio of 1.03x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Retail Distributors companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SGX:C07 Historical Debt, April 17th 2019

Is C07’s debt level acceptable?

C07 is a relatively highly levered company with a debt-to-equity of 55%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times C07’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For C07, the ratio of 19.5x suggests that interest is comfortably covered. Large-cap investments like C07 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

C07’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 C07'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 C07 has been performing in the past. I recommend you continue to research Jardine Cycle & Carriage to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for C07’s future growth? Take a look at our free research report of analyst consensus for C07’s outlook.
  2. Valuation: What is C07 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 C07 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.