In This Article:
BYD Company Limited (HKG:1211), a large-cap worth HK$135.31b, 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 health of the financials determines whether the company continues to succeed. Today we will look at BYD’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 1211 here.
See our latest analysis for BYD
How much cash does 1211 generate through its operations?
Over the past year, 1211 has ramped up its debt from CN¥54.87b to CN¥64.88b – this includes both the current and long-term debt. With this increase in debt, 1211 currently has CN¥10.43b remaining in cash and short-term investments , ready to deploy into the business. Moreover, 1211 has produced cash from operations of CN¥8.23b during the same period of time, leading to an operating cash to total debt ratio of 12.7%, signalling that 1211’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1211’s case, it is able to generate 0.13x cash from its debt capital.
Can 1211 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥119.07b, the company is not able to meet these obligations given the level of current assets of CN¥111.93b, with a current ratio of 0.94x below the prudent level of 3x.
Can 1211 service its debt comfortably?
Since equity is smaller than total debt levels, BYD is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. 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 1211’s case, the ratio of 2.78x suggests that interest is not strongly covered. Although it is highly unlikely we’d see BYD defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.