With a market capitalization of HK$196b, Henderson Land Development Company Limited (HKG:12) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for 12, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
How much cash does 12 generate through its operations?
Over the past year, 12 has ramped up its debt from HK$80b to HK$89b , which accounts for long term debt. With this growth in debt, 12’s cash and short-term investments stands at HK$18b , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 12’s operating efficiency ratios such as ROA here.
Can 12 meet its short-term obligations with the cash in hand?
With current liabilities at HK$52b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.59x. For Real Estate 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.
Can 12 service its debt comfortably?
With debt at 29% of equity, 12 may be thought of as appropriately levered. This range is considered safe as 12 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 12’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 12, the ratio of 16.21x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 12 and other large-cap investments thought to be safe.
12’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 12 has company-specific issues impacting its capital structure decisions. You should continue to research Henderson Land Development to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 12’s future growth? Take a look at our free research report of analyst consensus for 12’s outlook.
- Valuation: What is 12 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 12 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.