China Overseas Current Debt

CAOVY Stock  USD 10.56  0.37  3.63%   
China Overseas Land holds a debt-to-equity ratio of 0.764. With a high degree of financial leverage come high-interest payments, which usually reduce China Overseas' Earnings Per Share (EPS).

Asset vs Debt

Equity vs Debt

China Overseas' liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. China Overseas' cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps China Pink Sheet's retail investors understand whether an upcoming fall or rise in the market will negatively affect China Overseas' stakeholders.
For most companies, including China Overseas, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for the executing running China Overseas Land the most critical issue when dealing with liquidity needs is whether the current assets are properly aligned with its current liabilities. If not, management will need to obtain alternative financing to ensure that there are always enough cash equivalents on the balance sheet in reserve to pay for obligations.
Given that China Overseas' debt-to-equity ratio measures a Company's obligations relative to the value of its net assets, it is usually used by traders to estimate the extent to which China Overseas is acquiring new debt as a mechanism of leveraging its assets. A high debt-to-equity ratio is generally associated with increased risk, implying that it has been aggressive in financing its growth with debt. Another way to look at debt-to-equity ratios is to compare the overall debt load of China Overseas to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, China Overseas is said to be less leveraged. If creditors hold a majority of China Overseas' assets, the Company is said to be highly leveraged.
  
Check out the analysis of China Overseas Fundamentals Over Time.

China Overseas Financial Leverage Rating

China Overseas Land bond ratings play a critical role in determining how much China Overseas have to pay to access credit markets, i.e., the amount of interest on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for China Overseas' borrowing costs.

China Overseas Land Debt to Cash Allocation

As China Overseas Land follows its natural business cycle, the capital allocation decisions will not magically go away. China Overseas' decision-makers have to determine if most of the cash flows will be poured back into or reinvested in the business, reserved for other projects beyond operational needs, or paid back to stakeholders and investors. Many companies eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
The company has accumulated 197.3 B in total debt with debt to equity ratio (D/E) of 0.76, which is about average as compared to similar companies. China Overseas Land has a current ratio of 2.38, suggesting that it is liquid and has the ability to pay its financial obligations in time and when they become due. Debt can assist China Overseas until it has trouble settling it off, either with new capital or with free cash flow. So, China Overseas' shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like China Overseas Land sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for China to invest in growth at high rates of return. When we think about China Overseas' use of debt, we should always consider it together with cash and equity.

China Overseas Assets Financed by Debt

Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the China Overseas' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of China Overseas, which in turn will lower the firm's financial flexibility. Like all other financial ratios, a a China Overseas debt ratio should be compared their industry average or other competing firms.

Understaning China Overseas Use of Financial Leverage

China Overseas financial leverage ratio helps in determining the effect of debt on the overall profitability of the company. It measures China Overseas's total debt position, including all of outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of China Overseas assets, the company is considered highly leveraged. Understanding the composition and structure of overall China Overseas debt and outstanding corporate bonds gives a good idea of how risky the capital structure of a business and if it is worth investing in it. Financial leverage can amplify the potential profits to China Overseas' owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of China Overseas' financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets).
China Overseas Land Investment Limited, an investment holding company, engages in the property development and investment, and other operations in the Peoples Republic of China and the United Kingdom. China Overseas Land Investment Limited is a subsidiary of China Overseas Holdings Limited. China Overseas operates under Real EstateDevelopment classification in the United States and is traded on OTC Exchange. It employs 5692 people.
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Check out the analysis of China Overseas Fundamentals Over Time.
You can also try the Equity Valuation module to check real value of public entities based on technical and fundamental data.

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Please note, there is a significant difference between China Overseas' value and its price as these two are different measures arrived at by different means. Investors typically determine if China Overseas is a good investment by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, China Overseas' price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.

What is Financial Leverage?

Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.

Leverage and Capital Costs

The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.

Benefits of Financial Leverage

Leverage provides the following benefits for companies:
  • Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
  • It provides a variety of financing sources by which the firm can achieve its target earnings.
  • Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.