The size of CapitaLand Limited (SGX:C31), a S$14b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at CapitaLand’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into C31 here.
How does C31’s operating cash flow stack up against its debt?
Over the past year, C31 has ramped up its debt from S$22b to S$24b , which includes long-term debt. With this rise in debt, C31 currently has S$5.1b remaining in cash and short-term investments , ready to deploy into the business. Additionally, C31 has produced S$553m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 2.3%, signalling that C31’s operating cash is not sufficient to cover its 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 0.023x cash from its debt capital.
Does C31’s liquid assets cover its short-term commitments?
With current liabilities at S$9.4b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.32x. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is C31’s debt level acceptable?
With debt reaching 71% of equity, C31 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of C31’s debt levels to the test by looking at how well interest payments are covered by earnings. 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 5x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes C31 and other large-cap investments thought to be safe.
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 an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. 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 better picture of the stock by looking at:
- 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.
- Historical Performance: What has C31’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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