What does China Everbright International Limited's (HKG:257) Balance Sheet Tell Us About Its Future?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as China Everbright International Limited (HKG:257), with a market capitalization of HK$43b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine 257’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 257 here.
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How does 257’s operating cash flow stack up against its debt?
257 has built up its total debt levels in the last twelve months, from HK$26b to HK$36b , which accounts for long term debt. With this growth in debt, 257 currently has HK$8.0b remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 257’s operating efficiency ratios such as ROA here.
Can 257 pay its short-term liabilities?
At the current liabilities level of HK$15b, it seems that the business has been able to meet these obligations given the level of current assets of HK$20b, with a current ratio of 1.36x. For Commercial Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is 257’s debt level acceptable?
With total debt exceeding equities, 257 is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 257 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 257's, case, the ratio of 6.87x 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 257’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 257's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 257 has been performing in the past. I recommend you continue to research China Everbright International to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 257’s future growth? Take a look at our free research report of analyst consensus for 257’s outlook.
- Historical Performance: What has 257's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.