Is Zhejiang Expressway Co Ltd (HKG:576) As Strong As Its Balance Sheet Indicates?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Zhejiang Expressway Co Ltd (HKG:576), with a market cap of HK$29.53b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine 576’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 576 here. View out our latest analysis for Zhejiang Expressway

Does 576 produce enough cash relative to debt?

576’s debt level has been constant at around HK$24.86b over the previous year – this includes both the current and long-term debt. At this stable level of debt, 576’s cash and short-term investments stands at HK$19.98b , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 576’s operating efficiency ratios such as ROA here.

Can 576 meet its short-term obligations with the cash in hand?

With current liabilities at HK$32.42b, the company has been able to meet these commitments with a current assets level of HK$53.95b, leading to a 1.66x current account ratio. Generally, for Infrastructure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:576 Historical Debt June 29th 18
SEHK:576 Historical Debt June 29th 18

Can 576 service its debt comfortably?

With debt at 34.96% of equity, 576 may be thought of as appropriately levered. This range is considered safe as 576 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 576 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 576’s, case, the ratio of 8.25x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 576 ample headroom to grow its debt facilities.

Next Steps:

576’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 576 has been performing in the past. I recommend you continue to research Zhejiang Expressway to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 576’s future growth? Take a look at our free research report of analyst consensus for 576’s outlook.
  2. Valuation: What is 576 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 576 is currently mispriced by the market.
  3. 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.