With a market capitalization of HK$87b, Hang Lung Properties Limited (HKG:101) 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. 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. Using the most recent data for 101, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does 101 Produce Much Cash Relative To Its Debt?
Over the past year, 101 has ramped up its debt from HK$25b to HK$28b , which includes long-term debt. With this increase in debt, 101 currently has HK$6.7b remaining in cash and short-term investments , ready to be used for running the business. Moreover, 101 has generated HK$5.7b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 21%, meaning that 101’s operating cash is sufficient to cover its debt.
Does 101’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$8.9b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.69x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 101’s debt level acceptable?
101’s level of debt is appropriate relative to its total equity, at 19%. 101 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 101 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. In 101's case, the ratio of 10.63x suggests that interest is amply covered. Large-cap investments like 101 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although 101’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for 101's financial health. Other important fundamentals need to be considered alongside. You should continue to research Hang Lung Properties to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 101’s future growth? Take a look at our free research report of analyst consensus for 101’s outlook.
- Valuation: What is 101 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 101 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.
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