How Financially Strong Is El Paso Electric Company (NYSE:EE)?
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as El Paso Electric Company (NYSE:EE) with a market-capitalization of US$2.4b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. EE’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into EE here.
View our latest analysis for El Paso Electric
Does EE Produce Much Cash Relative To Its Debt?
EE has sustained its debt level by about US$1.4b over the last 12 months including long-term debt. At this constant level of debt, EE currently has US$13m remaining in cash and short-term investments to keep the business going. On top of this, EE has generated US$285m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20%, meaning that EE’s current level of operating cash is not high enough to cover debt.
Can EE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$313m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$174m, with a current ratio of 0.55x. The current ratio is calculated by dividing current assets by current liabilities.
Is EE’s debt level acceptable?
With total debt exceeding equity, EE is considered a highly levered company. 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 EE's case, the ratio of 2.53x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
EE’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. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure EE has company-specific issues impacting its capital structure decisions. I recommend you continue to research El Paso Electric to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for EE’s future growth? Take a look at our free research report of analyst consensus for EE’s outlook.
Valuation: What is EE 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 EE 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 editorial-team@simplywallst.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.
