Are CapitaLand Limited’s (SGX:C31) Interest Costs Too High?

Stocks with market capitalization between $2B and $10B, such as CapitaLand Limited (SGX:C31) with a size of S$12.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. C31’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into C31 here.

See our latest analysis for CapitaLand

How much cash does C31 generate through its operations?

C31’s debt levels surged from S$14.4b to S$21.9b over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at S$5.3b for investing into the business. Moreover, C31 has produced S$2.7b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 12%, signalling that C31’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In C31’s case, it is able to generate 0.12x cash from its debt capital.

Can C31 pay its short-term liabilities?

With current liabilities at S$9.0b, it appears that the company has been able to meet these obligations given the level of current assets of S$11.4b, with a current ratio of 1.27x. Generally, for Real Estate 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.

SGX:C31 Historical Debt October 29th 18
SGX:C31 Historical Debt October 29th 18

Can C31 service its debt comfortably?

With a debt-to-equity ratio of 66%, C31 can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In C31’s case, the ratio of 3.6x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

C31’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 C31 has company-specific issues impacting its capital structure decisions. I suggest you continue to research CapitaLand to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for C31’s future growth? Take a look at our free research report of analyst consensus for C31’s outlook.
  2. Valuation: What is C31 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 C31 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.