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The size of China Communications Construction Company Limited (HKG:1800), a HK$188b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. This article will examine China Communications Construction’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 1800 here.
1800’s Debt (And Cash Flows)
1800’s debt levels surged from CN¥273b to CN¥294b over the last 12 months , which accounts for long term debt. With this rise in debt, 1800 currently has CN¥106b remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of 1800’s operating efficiency ratios such as ROA here.
Can 1800 meet its short-term obligations with the cash in hand?
Looking at 1800’s CN¥467b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥479b, with a current ratio of 1.03x. The current ratio is the number you get when you divide current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1800 face the risk of succumbing to its debt-load?
China Communications Construction is a highly levered company given that total debt exceeds equity. 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. We can test if 1800’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For 1800, the ratio of 6.81x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 1800 and other large-cap investments thought to be safe.
1800’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how 1800 has been performing in the past. I suggest you continue to research China Communications Construction to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1800’s future growth? Take a look at our free research report of analyst consensus for 1800’s outlook.
- Valuation: What is 1800 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1800 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.