A market capitalization of HK$125.62B puts WH Group Limited (SEHK:288) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its 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. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for WH Group
Does 288 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%. In the case of 288, the debt-to-equity ratio is 46.79%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. 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. 288’s interest on debt is sufficiently covered by earnings as it sits at around 14.32x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does 288 generate an acceptable amount of cash through operations?
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 288’s debt repayment capacity, which is not a big concern for a large company. 288’s recent operating cash flow was 0.45 times its debt within the past year. This is a good sign, as over a quarter of 288’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? 288’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that 288’s financial position may change, I encourage examining market expectations for 288’s future growth on our free analysis platform.