There are a number of reasons that attract investors towards large-cap companies such as CK Asset Holdings Limited (SEHK:1113), with a market cap of HK$252.17B. One such reason is its ‘too big to fail’ aura which gives it the appearance of a strong and healthy investment. However, investors may not be aware of the metrics used to measure financial health. There are always disruptions which destabilize an existing industry, and although large-caps are hard to knock down, it is useful to understand its level of resilience. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for CK Asset Holdings
Does 1113 face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. 1113’s debt-to-equity ratio stands at 29.03%, which means the risk of facing a debt-overhang is very low. While debt-to-equity ratio has several factors at play, an easier way to check whether 1113’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. 1113’s profits amply covers interest at 32.89 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving 1113 ample headroom to grow its debt facilities.
How does 1113’s operating cash flow stack up against its debt?
A basic way to evaluate 1113’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether 1113 has the ability to repay its debt with cash from its business, which is less of a concern for large companies. 1113’s recent operating cash flow was 0.52 times its debt within the past year. A ratio of over 0.5x is a positive sign and shows that 1113 is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? 1113 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Since 1113’s financial position may change, You should continue assessing market expectations for 1113’s future growth on our free analysis platform.