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There are a number of reasons that attract investors towards large-cap companies such as Sands China Ltd. (HKG:1928), with a market cap of HK$302b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. Today we will look at Sands China’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into 1928 here.
Does 1928 Produce Much Cash Relative To Its Debt?
Over the past year, 1928 has ramped up its debt from US$4.4b to US$5.6b , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$2.7b , ready to be used for running the business. Moreover, 1928 has generated US$3.0b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 55%, signalling that 1928’s operating cash is sufficient to cover its debt.
Can 1928 meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.9b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.64x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 1928 service its debt comfortably?
With total debt exceeding equities, Sands China is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether 1928 is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For 1928, the ratio of 11.47x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like 1928 are considered a risk-averse investment.
Although 1928’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 1928’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 1928’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Sands China to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1928’s future growth? Take a look at our free research report of analyst consensus for 1928’s outlook.
- Valuation: What is 1928 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 1928 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 email@example.com. 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.