Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Zall Group Ltd (SEHK:2098) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, its financial health remains the key to continued success. Today we will look at Zall Group’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 2098 here. See our latest analysis for Zall Group

How much cash does 2098 generate through its operations?

2098’s debt levels surged from CN¥8.39B to CN¥11.59B over the last 12 months – this includes both the current and long-term debt. With this increase in debt, 2098 currently has CN¥3.64B remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 2098’s operating efficiency ratios such as ROA here.

Can 2098 meet its short-term obligations with the cash in hand?

With current liabilities at CN¥19.41B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 2098 service its debt comfortably?

2098 is a relatively highly levered company with a debt-to-equity of 62.10%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times 2098’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 2098’s case, the ratio of 1.29x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Zall Group 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.