Is Towngas China Company Limited's (HKG:1083) Balance Sheet A Threat To Its Future?

Simply Wall St

Fri, May 3, 2019, 7:41 PM

Stocks with market capitalization between $2B and $10B, such as Towngas China Company Limited (HKG:1083) with a size of HK$17b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. 1083’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 1083 here.

See our latest analysis for Towngas China

Does 1083 Produce Much Cash Relative To Its Debt?

1083 has built up its total debt levels in the last twelve months, from HK$8.9b to HK$9.6b , which accounts for long term debt. With this rise in debt, 1083's cash and short-term investments stands at HK$1.7b to keep the business going. Additionally, 1083 has generated HK$1.3b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13%, indicating that 1083’s operating cash is less than its debt.

Can 1083 pay its short-term liabilities?

Looking at 1083’s HK$9.0b in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of HK$4.5b, leading to a current ratio of 0.5x. The current ratio is the number you get when you divide current assets by current liabilities.

Does 1083 face the risk of succumbing to its debt-load?

With debt reaching 54% of equity, 1083 may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 1083’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1083, the ratio of 6.67x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although 1083’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for 1083's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Towngas China to get a more holistic view of the stock by looking at: