Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as American States Water Company (NYSE:AWR), with a market cap of US$2.8b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine AWR’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into AWR here.
AWR’s Debt (And Cash Flows)
Over the past year, AWR has ramped up its debt from US$390m to US$439m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$1.8m , ready to be used for running the business. Moreover, AWR has produced cash from operations of US$130m over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that AWR’s current level of operating cash is high enough to cover debt.
Can AWR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$108m, it seems that the business has been able to meet these commitments with a current assets level of US$117m, leading to a 1.08x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Water Utilities companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can AWR service its debt comfortably?
With debt reaching 77% of equity, AWR may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AWR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AWR's, case, the ratio of 5.3x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as AWR’s high interest coverage is seen as responsible and safe practice.
AWR’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. Since there is also no concerns around AWR's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how AWR has been performing in the past. You should continue to research American States Water to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AWR’s future growth? Take a look at our free research report of analyst consensus for AWR’s outlook.
- Historical Performance: What has AWR's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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