Air China Limited (SEHK:753), a large-cap worth HK$184.43B, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to their continued success lies in its financial health. Let’s take a look at Air China’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 753 here. Check out our latest analysis for Air China
Does 753 produce enough cash relative to debt?
753’s debt level has been constant at around CN¥106,203.9M over the previous year made up of current and long term debt. At this current level of debt, 753’s cash and short-term investments stands at CN¥7,322.6M , ready to deploy into the business. Moreover, 753 has produced cash from operations of CN¥30,724.4M during the same period of time, leading to an operating cash to total debt ratio of 28.93%, meaning that 753’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 753’s case, it is able to generate 0.29x cash from its debt capital.
Does 753’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥63,846.4M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.3x, which is below the prudent industry ratio of 3x.
Can 753 service its debt comfortably?
Air China is a highly levered company given that total debt exceeds equity. 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 an advantage over small-caps through lower cost of capital due to cheaper financing.
Next Steps:
Although 753’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. However, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how 753 has been performing in the past. You should continue to research Air China to get a better picture of the stock by looking at: