The size of Air China Limited (HKG:753), a HK$154b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. This article will examine Air China’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 753 here.
Does 753 Produce Much Cash Relative To Its Debt?
753 has sustained its debt level by about CN¥100b over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at CN¥9.8b to keep the business going. Additionally, 753 has generated cash from operations of CN¥32b over the same time period, leading to an operating cash to total debt ratio of 32%, indicating that 753’s debt is appropriately covered by operating cash.
Does 753’s liquid assets cover its short-term commitments?
With current liabilities at CN¥78b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.33x. The current ratio is the number you get when you divide current assets by current liabilities.
Does 753 face the risk of succumbing to its debt-load?
With debt reaching 97% of equity, 753 may be thought of as relatively highly levered. 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For 753, the ratio of 7.03x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 753 and other large-cap investments thought to be safe.
753’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure 753 has company-specific issues impacting its capital structure decisions. You should continue to research Air China to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 753’s future growth? Take a look at our free research report of analyst consensus for 753’s outlook.
- Valuation: What is 753 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 753 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.
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