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Mid-caps stocks, like Cabot Oil & Gas Corporation (NYSE:COG) with a market capitalization of US$10.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. COG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into COG here.
Does COG Produce Much Cash Relative To Its Debt?
COG has shrunk its total debt levels in the last twelve months, from US$1.5b to US$1.3b , which includes long-term debt. With this debt repayment, COG's cash and short-term investments stands at US$315m to keep the business going. Additionally, COG has generated cash from operations of US$1.4b during the same period of time, leading to an operating cash to total debt ratio of 112%, meaning that COG’s operating cash is sufficient to cover its debt.
Can COG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$240m, it seems that the business has been able to meet these obligations given the level of current assets of US$680m, with a current ratio of 2.83x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does COG face the risk of succumbing to its debt-load?
With debt reaching 53% of equity, COG 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 COG's case, the ratio of 14.06x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as COG’s high interest coverage is seen as responsible and safe practice.
Although COG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for COG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cabot Oil & Gas to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for COG’s future growth? Take a look at our free research report of analyst consensus for COG’s outlook.
- Valuation: What is COG 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 COG 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 email@example.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.