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China Shenhua Energy Company Limited (HKG:1088), a large-cap worth HK$422b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Today I will analyse the latest financial data for 1088 to determine is solvency and liquidity and whether the stock is a sound investment.
1088’s Debt (And Cash Flows)
1088's debt levels have fallen from CN¥94b to CN¥57b over the last 12 months , which includes long-term debt. With this debt repayment, 1088 currently has CN¥82b remaining in cash and short-term investments , ready to be used for running the business. On top of this, 1088 has generated CN¥107b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 190%, meaning that 1088’s operating cash is sufficient to cover its debt.
Can 1088 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥93b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1088 face the risk of succumbing to its debt-load?
With debt at 13% of equity, 1088 may be thought of as appropriately levered. This range is considered safe as 1088 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 1088 is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For 1088, the ratio of 26.91x suggests that interest is comfortably covered. Large-cap investments like 1088 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
1088 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 1088's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Shenhua Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1088’s future growth? Take a look at our free research report of analyst consensus for 1088’s outlook.
- Valuation: What is 1088 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 1088 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.
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 email@example.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.