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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Alibaba Health Information Technology Limited (HKG:241) 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. However, its financial health remains the key to continued success. Let’s take a look at Alibaba Health Information Technology’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 241 here.
View our latest analysis for Alibaba Health Information Technology
Does 241 produce enough cash relative to debt?
241 has built up its total debt levels in the last twelve months, from CN¥200m to CN¥1.2b . With this rise in debt, the current cash and short-term investment levels stands at CN¥2.3b for investing into the business. Moreover, 241 has generated CN¥349m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 28%, signalling that 241’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 241’s case, it is able to generate 0.28x cash from its debt capital.
Can 241 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥2.8b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Generally, for Healthcare Services 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 241 service its debt comfortably?
241 is a relatively highly levered company with a debt-to-equity of 47%. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since 241 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.