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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as CK Infrastructure Holdings Limited (HKG:1038) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. Today we will look at CK Infrastructure 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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into 1038 here.

See our latest analysis for CK Infrastructure Holdings

1038’s Debt (And Cash Flows)

1038's debt levels have fallen from HK$50b to HK$45b over the last 12 months , which includes long-term debt. With this reduction in debt, 1038's cash and short-term investments stands at HK$6.1b to keep the business going. Additionally, 1038 has generated HK$3.9b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 8.7%, indicating that 1038’s current level of operating cash is not high enough to cover debt.

Can 1038 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$6.3b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.27x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Electric Utilities 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.

Can 1038 service its debt comfortably?

With a debt-to-equity ratio of 42%, 1038 can be considered as an above-average leveraged company. 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 1038’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1038's case, the ratio of 4.49x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as 1038 is a safe investment.