Stocks with market capitalization between $2B and $10B, such as California Water Service Group (NYSE:CWT) with a size of US$2.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine CWT’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 CWT here.
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Does CWT produce enough cash relative to debt?
Over the past year, CWT has ramped up its debt from US$751m to US$894m , which includes long-term debt. With this growth in debt, CWT currently has US$66m remaining in cash and short-term investments for investing into the business. Additionally, CWT has generated cash from operations of US$158m over the same time period, leading to an operating cash to total debt ratio of 18%, signalling that CWT’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CWT’s case, it is able to generate 0.18x cash from its debt capital.
Does CWT’s liquid assets cover its short-term commitments?
With current liabilities at US$382m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$236m, leading to a current ratio of 0.62x.
Does CWT face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, CWT is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 CWT’s case, the ratio of 2.82x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although CWT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for CWT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research California Water Service Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CWT’s future growth? Take a look at our free research report of analyst consensus for CWT’s outlook.
- Historical Performance: What has CWT’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.