Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Cimarex Energy Co. (NYSE:XEC), with a market capitalization of US$7.1b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at XEC’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into XEC here.
XEC’s Debt (And Cash Flows)
Over the past year, XEC has maintained its debt levels at around US$1.5b – this includes long-term debt. At this constant level of debt, XEC's cash and short-term investments stands at US$801m to keep the business going. Moreover, XEC has generated US$1.6b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 104%, indicating that XEC’s operating cash is sufficient to cover its debt.
Can XEC pay its short-term liabilities?
With current liabilities at US$709m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.01x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can XEC service its debt comfortably?
XEC is a relatively highly levered company with a debt-to-equity of 45%. 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 XEC's case, the ratio of 28.87x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as XEC’s high interest coverage is seen as responsible and safe practice.
XEC’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 XEC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for XEC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Cimarex Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for XEC’s future growth? Take a look at our free research report of analyst consensus for XEC’s outlook.
- Valuation: What is XEC 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 XEC 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.
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