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Does New World Development Company Limited’s (HKG:17) Debt Level Pose A Problem?

New World Development Company Limited (HKG:17), a large-cap worth HK$117.24b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. This article will examine New World Development’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into 17 here. View out our latest analysis for New World Development

How does 17’s operating cash flow stack up against its debt?

17 has built up its total debt levels in the last twelve months, from HK$135.73b to HK$0 – this includes both the current and long-term debt. With this growth in debt, 17 currently has HK$78.43b remaining in cash and short-term investments for investing into the business. Moreover, 17 has produced HK$3.16b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 2.14%, indicating that 17’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 17’s case, it is able to generate 0.021x cash from its debt capital.

Can 17 pay its short-term liabilities?

At the current liabilities level of HK$79.50b liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$178.98b, leading to a 2.25x current account ratio. Usually, for Real Estate companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:17 Historical Debt June 22nd 18
SEHK:17 Historical Debt June 22nd 18

Is 17’s debt level acceptable?

With a debt-to-equity ratio of 61.38%, 17 can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether 17 is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In 17’s case, the ratio of 1356x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes 17 and other large-cap investments thought to be safe.

Next Steps:

At its current level of cash flow coverage, 17 has room for improvement to better cushion for events which may require debt repayment. 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 17’s financial health. Other important fundamentals need to be considered alongside. You should continue to research New World Development 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 17’s future growth? Take a look at our free research report of analyst consensus for 17’s outlook.

  2. Valuation: What is 17 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 17 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.