There are a number of reasons that attract investors towards large-cap companies such as Sunac China Holdings Limited (SEHK:1918), with a market cap of HK$138.43B. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. 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. View our latest analysis for Sunac China Holdings
Is 1918’s level of debt at an acceptable level?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. 1918’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. 1918’s profits only covers interest 2.5 times, which is deemed as inadequate. Lenders may be more reluctant to lend out more funding as 1918’s low interest coverage already puts the company at higher risk of default.
How does 1918’s operating cash flow stack up against its debt?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This also assesses 1918’s debt repayment capacity, which is not a big concern for a large company. Last year, 1918’s operating cash flow was 0.19x its current debt. This means, over a tenth of 1918’s near term debt can be covered by its day-to-day cash income, which somewhat reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? 1918’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think 1918 can improve in terms of debt management and operational efficiency. Since 1918’s financial position may change, I recommend researching market expectations for 1918’s future growth on our free analysis platform.