PetroChina Company Limited (HKG:857), a large-cap worth HK$1.5t, 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. Using the most recent data for 857, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
857’s Debt (And Cash Flows)
857 has shrunk its total debt levels in the last twelve months, from CN¥465b to CN¥407b , which includes long-term debt. With this reduction in debt, 857's cash and short-term investments stands at CN¥95b , ready to be used for running the business. On top of this, 857 has produced cash from operations of CN¥352b during the same period of time, resulting in an operating cash to total debt ratio of 86%, signalling that 857’s operating cash is sufficient to cover its debt.
Does 857’s liquid assets cover its short-term commitments?
Looking at 857’s CN¥586b in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of CN¥433b, leading to a current ratio of 0.74x. The current ratio is calculated by dividing current assets by current liabilities.
Does 857 face the risk of succumbing to its debt-load?
857’s level of debt is appropriate relative to its total equity, at 29%. This range is considered safe as 857 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 857’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For 857, the ratio of 7.95x suggests that interest is appropriately covered. Large-cap investments like 857 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
857’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure 857 has company-specific issues impacting its capital structure decisions. I recommend you continue to research PetroChina to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 857’s future growth? Take a look at our free research report of analyst consensus for 857’s outlook.
- Valuation: What is 857 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 857 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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