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The size of China Overseas Land & Investment Limited (HKG:688), a HK$320b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. This article will examine China Overseas Land & Investment’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 688 here.
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How does 688’s operating cash flow stack up against its debt?
688 has built up its total debt levels in the last twelve months, from HK$159b to HK$205b , which accounts for long term debt. With this increase in debt, 688’s cash and short-term investments stands at HK$124b , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 688’s operating efficiency ratios such as ROA here.
Can 688 meet its short-term obligations with the cash in hand?
Looking at 688’s HK$236b in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$562b, with a current ratio of 2.38x. Generally, for Real Estate companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 688 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 72%, 688 can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing.
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688’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure 688 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Overseas Land & Investment to get a more holistic view of the stock by looking at: