Yahoo Finance Are Melco International Development Limited’s (HKG:200) Interest Costs Too High?
Mid-caps stocks, like Melco International Development Limited (HKG:200) with a market capitalization of HK$27b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. 200’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into 200 here.
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How much cash does 200 generate through its operations?
200’s debt level has been constant at around HK$37b over the previous year including long-term debt. At this constant level of debt, 200’s cash and short-term investments stands at HK$13b , ready to deploy into the business. Moreover, 200 has generated HK$8.5b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23%, indicating that 200’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 200’s case, it is able to generate 0.23x cash from its debt capital.
Can 200 meet its short-term obligations with the cash in hand?
With current liabilities at HK$15b, it seems that the business has been able to meet these obligations given the level of current assets of HK$15b, with a current ratio of 1.06x. Generally, for Hospitality 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.
Can 200 service its debt comfortably?
200 is a relatively highly levered company with a debt-to-equity of 79%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 200’s case, the ratio of 1.89x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 200’s low interest coverage already puts the company at higher risk of default.
Next Steps:
200’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 200 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Melco International Development to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 200’s future growth? Take a look at our free research report of analyst consensus for 200’s outlook.
Valuation: What is 200 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 200 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.
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.
