Investors pursuing a solid, dependable stock investment can often be led to The Hong Kong and China Gas Company Limited (HKG:3), a large-cap worth HK$234b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. Let’s take a look at Hong Kong and China Gas’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into 3 here.

See our latest analysis for Hong Kong and China Gas

How does 3’s operating cash flow stack up against its debt?

3’s debt levels surged from HK$35b to HK$41b over the last 12 months , which includes long-term debt. With this rise in debt, 3’s cash and short-term investments stands at HK$13b for investing into the business. On top of this, 3 has generated cash from operations of HK$9.1b during the same period of time, resulting in an operating cash to total debt ratio of 22%, signalling that 3’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 3’s case, it is able to generate 0.22x cash from its debt capital.

Can 3 meet its short-term obligations with the cash in hand?

With current liabilities at HK$33b, the company may not have an easy time meeting these commitments with a current assets level of HK$25b, leading to a current ratio of 0.76x.

Can 3 service its debt comfortably?

With debt reaching 57% of equity, 3 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. We can assess the sustainability of 3’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For 3, the ratio of 10.08x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as 3 is a safe investment.

Next Steps:

At its current level of cash flow coverage, 3 has room for improvement to better cushion for events which may require debt repayment. Furthermore, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for 3’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hong Kong and China Gas to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 3’s future growth? Take a look at our free research report of analyst consensus for 3’s outlook.

2. Valuation: What is 3 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 3 is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.