Is Henderson Land Development Company Limited's (HKG:12) Liquidity Good Enough?
Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Henderson Land Development Company Limited (HKG:12). With a market valuation of HK$212b, 12 is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for 12, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
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12’s Debt (And Cash Flows)
12's debt levels surged from HK$81b to HK$88b over the last 12 months , which accounts for long term debt. With this growth in debt, 12 currently has HK$17b remaining in cash and short-term investments , ready to be used for running the business. Additionally, 12 has generated cash from operations of HK$3.8b over the same time period, leading to an operating cash to total debt ratio of 4.3%, meaning that 12’s operating cash is less than its debt.
Does 12’s liquid assets cover its short-term commitments?
Looking at 12’s HK$62b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Real Estate 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.
Does 12 face the risk of succumbing to its debt-load?
12’s level of debt is appropriate relative to its total equity, at 28%. 12 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 12’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For 12, the ratio of 22.4x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 12 and other large-cap investments thought to be safe.
Next Steps:
12’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for 12's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Henderson Land Development to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 12’s future growth? Take a look at our free research report of analyst consensus for 12’s outlook.
Valuation: What is 12 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 12 is currently mispriced by the market.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
