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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as CK Hutchison Holdings Limited (HKG:1) 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 CK Hutchison Holdings’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into 1 here.
Check out our latest analysis for CK Hutchison Holdings
Does 1 Produce Much Cash Relative To Its Debt?
1's debt level has been constant at around HK$354b over the previous year – this includes long-term debt. At this stable level of debt, 1's cash and short-term investments stands at HK$135b to keep the business going. Moreover, 1 has produced HK$56b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16%, signalling that 1’s debt is not covered by operating cash.
Can 1 meet its short-term obligations with the cash in hand?
Looking at 1’s HK$222b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.55x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Industrials companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can 1 service its debt comfortably?
With debt reaching 60% of equity, 1 may be thought of as relatively highly levered. 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. By measuring how many times 1’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In 1's case, the ratio of 4.24x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 1 and other large-cap investments thought to be safe.