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Is NetEase, Inc.’s (NASDAQ:NTES) Liquidity Good Enough?

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With a market capitalization of US$30b, NetEase, Inc. (NASDAQ:NTES) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for NTES, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.

Check out our latest analysis for NetEase

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

NTES has built up its total debt levels in the last twelve months, from CN¥5.7b to CN¥14b made up of predominantly near term debt. With this rise in debt, NTES currently has CN¥42b remaining in cash and short-term investments for investing into the business. Moreover, NTES has produced CN¥11b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 83%, indicating that NTES’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NTES’s case, it is able to generate 0.83x cash from its debt capital.

Can NTES pay its short-term liabilities?

Looking at NTES’s CN¥33b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.9x. Usually, for Entertainment companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NASDAQGS:NTES Historical Debt February 20th 19
NASDAQGS:NTES Historical Debt February 20th 19

Can NTES service its debt comfortably?

With debt at 30% of equity, NTES may be thought of as appropriately levered. NTES is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.

Next Steps:

NTES has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure NTES has company-specific issues impacting its capital structure decisions. You should continue to research NetEase to get a more holistic view of the stock by looking at:

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

  2. Valuation: What is NTES 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 NTES 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.