Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as BAIC Motor Corporation Limited (SEHK:1958) a safer option. 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 extending previous success is in the health of the company’s financials. This article will examine BAIC Motor’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 1958 here. View our latest analysis for BAIC Motor

How does 1958’s operating cash flow stack up against its debt?

1958’s debt levels surged from CN¥30.27B to CN¥35.38B over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, 1958’s cash and short-term investments stands at CN¥36.06B , ready to deploy into the business. Additionally, 1958 has produced cash from operations of CN¥16.65B over the same time period, resulting in an operating cash to total debt ratio of 47.05%, signalling that 1958’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 1958’s case, it is able to generate 0.47x cash from its debt capital.

Can 1958 pay its short-term liabilities?

At the current liabilities level of CN¥98.16B liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.87x, which is below the prudent industry ratio of 3x.

Is 1958’s debt level acceptable?

1958 is a relatively highly levered company with a debt-to-equity of 64.95%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can put the sustainability of 1958’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 1958’s case, the ratio of 32.41x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 1958 and other large-cap investments thought to be safe.