With a market capitalization of HK$183b, Wharf Real Estate Investment Company Limited (HKG:1997) 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. Using the most recent data for 1997, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does 1997 Produce Much Cash Relative To Its Debt?
1997's debt levels have fallen from HK$46b to HK$42b over the last 12 months – this includes long-term debt. With this reduction in debt, 1997 currently has HK$2.7b remaining in cash and short-term investments to keep the business going. Moreover, 1997 has produced HK$9.5b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22%, meaning that 1997’s debt is appropriately covered by operating cash.
Can 1997 pay its short-term liabilities?
Looking at 1997’s HK$14b in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.51x. The current ratio is the number you get when you divide current assets by current liabilities.
Does 1997 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 19%, 1997's debt level may be seen as prudent. 1997 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 1997 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For 1997, the ratio of 17.72x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as 1997 is a safe investment.
1997’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure 1997 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Wharf Real Estate Investment to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1997’s future growth? Take a look at our free research report of analyst consensus for 1997’s outlook.
- Valuation: What is 1997 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 1997 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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