Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like California Water Service Group (NYSE:CWT), with a market cap of US$2.5b, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. 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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CWT here.
CWT’s Debt (And Cash Flows)
Over the past year, CWT has ramped up its debt from US$797m to US$955m , which includes long-term debt. With this growth in debt, CWT currently has US$60m remaining in cash and short-term investments to keep the business going. On top of this, CWT has generated cash from operations of US$171m over the same time period, resulting in an operating cash to total debt ratio of 18%, signalling that CWT’s debt is not covered by operating cash.
Does CWT’s liquid assets cover its short-term commitments?
With current liabilities at US$384m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$193m, with a current ratio of 0.5x. The current ratio is calculated by dividing current assets by current liabilities.
Can CWT service its debt comfortably?
With total debt exceeding equity, CWT is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CWT 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 CWT's, case, the ratio of 2.61x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CWT’s low interest coverage already puts the company at higher risk 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. This is only a rough assessment of financial health, and I'm sure CWT has company-specific issues impacting its capital structure decisions. You should continue to research California Water Service Group to get a better picture 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.
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