Is CLP Holdings Limited’s (HKG:2) Balance Sheet Strong Enough To Weather A Storm?

The size of CLP Holdings Limited (HKG:2), a HK$231b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, its financial health remains the key to continued success. Today we will look at CLP Holdings’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 2 here.

View our latest analysis for CLP Holdings

Does 2 Produce Much Cash Relative To Its Debt?

2 has sustained its debt level by about HK$57b over the last 12 months – this includes long-term debt. At this constant level of debt, 2’s cash and short-term investments stands at HK$15b to keep the business going. Additionally, 2 has generated cash from operations of HK$24b in the last twelve months, resulting in an operating cash to total debt ratio of 42%, signalling that 2’s operating cash is sufficient to cover its debt.

Can 2 pay its short-term liabilities?

Looking at 2’s HK$42b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of HK$36b, with a current ratio of 0.85x. The current ratio is calculated by dividing current assets by current liabilities.

SEHK:2 Historical Debt, March 12th 2019
SEHK:2 Historical Debt, March 12th 2019

Can 2 service its debt comfortably?

With debt reaching 45% of equity, 2 may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained 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. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For 2, the ratio of 11.35x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 2 and other large-cap investments thought to be safe.

Next Steps:

Although 2’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for 2’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CLP Holdings to get a better picture of the stock by looking at:

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

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 editorial-team@simplywallst.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.