With a market capitalization of HK$413b, China Shenhua Energy Company Limited (HKG:1088) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for 1088 to determine is solvency and liquidity and whether the stock is a sound investment.
How does 1088’s operating cash flow stack up against its debt?
1088 has shrunken its total debt levels in the last twelve months, from CN¥90b to CN¥73b , which also accounts for long term debt. With this debt repayment, 1088 currently has CN¥107b remaining in cash and short-term investments for investing into the business. On top of this, 1088 has generated CN¥79b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 108%, signalling that 1088’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1088’s case, it is able to generate 1.08x cash from its debt capital.
Can 1088 pay its short-term liabilities?
With current liabilities at CN¥133b, it appears that the company has been able to meet these commitments with a current assets level of CN¥165b, leading to a 1.25x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 1088 service its debt comfortably?
With debt at 18% 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 test if 1088’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For 1088, the ratio of 21.21x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as 1088 is a safe investment.
1088’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1088 has been performing in the past. You should continue to research China Shenhua Energy to get a more holistic view 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.
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.
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