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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like BKW AG (VTX:BKW), with a market cap of CHF3.5b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at BKW’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into BKW here.
Does BKW Produce Much Cash Relative To Its Debt?
Over the past year, BKW has maintained its debt levels at around CHF1.5b including long-term debt. At this constant level of debt, BKW currently has CHF1.1b remaining in cash and short-term investments to keep the business going. On top of this, BKW has generated cash from operations of CHF373m in the last twelve months, leading to an operating cash to total debt ratio of 25%, meaning that BKW’s current level of operating cash is high enough to cover debt.
Can BKW meet its short-term obligations with the cash in hand?
At the current liabilities level of CHF1.5b, the company has been able to meet these obligations given the level of current assets of CHF2.2b, with a current ratio of 1.45x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electric Utilities companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BKW face the risk of succumbing to its debt-load?
With debt reaching 43% of equity, BKW 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. 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 BKW's case, the ratio of 3.25x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as BKW’s high interest coverage is seen as responsible and safe practice.
BKW’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 BKW'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 BKW has been performing in the past. I suggest you continue to research BKW to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BKW’s future growth? Take a look at our free research report of analyst consensus for BKW’s outlook.
- Valuation: What is BKW 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 BKW 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.
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 firstname.lastname@example.org. 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.