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Is Swire Properties Limited (HKG:1972) As Strong As Its Balance Sheet Indicates?

Swire Properties Limited (HKG:1972), a large-cap worth HK$169b, 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. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for 1972, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.

Check out our latest analysis for Swire Properties

How does 1972’s operating cash flow stack up against its debt?

1972 has shrunken its total debt levels in the last twelve months, from HK$36b to HK$34b – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$2.6b for investing into the business. Moreover, 1972 has produced cash from operations of HK$8.1b in the last twelve months, leading to an operating cash to total debt ratio of 24%, signalling that 1972’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1972’s case, it is able to generate 0.24x cash from its debt capital.

Can 1972 meet its short-term obligations with the cash in hand?

Looking at 1972’s HK$13b in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$22b, with a current ratio of 1.68x. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:1972 Historical Debt December 11th 18

Does 1972 face the risk of succumbing to its debt-load?

1972’s level of debt is appropriate relative to its total equity, at 12%. 1972 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 1972 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 1972’s case, the ratio of 9.83x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like 1972 are considered a risk-averse investment.

Next Steps:

1972’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how 1972 has been performing in the past. I suggest you continue to research Swire Properties to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1972’s future growth? Take a look at our free research report of analyst consensus for 1972’s outlook.
  2. Valuation: What is 1972 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 1972 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.

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.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.