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Are China National Building Material Company Limited’s (HKG:3323) Interest Costs Too High?

There are a number of reasons that attract investors towards large-cap companies such as China National Building Material Company Limited (SEHK:3323), with a market cap of HK$79.07B. 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, the health of the financials determines whether the company continues to succeed. I will provide an overview of China National Building Material’s financial liquidity and leverage to give you an idea of China National Building Material’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 3323 here. View our latest analysis for China National Building Material

How much cash does 3323 generate through its operations?

3323’s debt level has been constant at around CN¥201.01B over the previous year made up of current and long term debt. At this stable level of debt, 3323’s cash and short-term investments stands at CN¥12.29B for investing into the business. Additionally, 3323 has produced cash from operations of CN¥22.27B over the same time period, leading to an operating cash to total debt ratio of 11.08%, meaning that 3323’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 3323’s case, it is able to generate 0.11x cash from its debt capital.

Does 3323’s liquid assets cover its short-term commitments?

Looking at 3323’s most recent CN¥203.67B liabilities, it seems that the business has not been able to meet these commitments with a current assets level of CN¥126.18B, leading to a 0.62x current account ratio. which is under the appropriate industry ratio of 3x.

SEHK:3323 Historical Debt Jun 19th 18
SEHK:3323 Historical Debt Jun 19th 18

Is 3323’s debt level acceptable?

Considering China National Building Material’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can put the sustainability of 3323’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For 3323, the ratio of 2.41x suggests that interest is not strongly covered. Given the sheer size of China National Building Material, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to 3323.

Next Steps:

With a high level of debt on its balance sheet, 3323 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 3323 to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for 3323’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China National Building Material to get a better picture of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for 3323’s future growth? Take a look at our free research report of analyst consensus for 3323’s outlook.

  2. Valuation: What is 3323 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 3323 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 pass 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.