Stocks with market capitalization between $2B and $10B, such as EQT Midstream Partners LP (NYSE:EQM) with a size of US$4.46b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine EQM’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 EQM here. See our latest analysis for EQT Midstream Partners
How much cash does EQM generate through its operations?
Over the past year, EQM has ramped up its debt from US$985.73m to US$1.17b – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$6.56m for investing into the business. On top of this, EQM has produced US$650.55m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 55.73%, signalling that EQM’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EQM’s case, it is able to generate 0.56x cash from its debt capital.
Can EQM pay its short-term liabilities?
With current liabilities at US$212.24m, the company is not able to meet these obligations given the level of current assets of US$147.33m, with a current ratio of 0.69x below the prudent level of 3x.
Can EQM service its debt comfortably?
With a debt-to-equity ratio of 59.22%, EQM can be considered as an above-average 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 EQM’s case, the ratio of 15.7x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving EQM ample headroom to grow its debt facilities.
Although EQM’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. However, 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 EQM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research EQT Midstream Partners to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EQM’s future growth? Take a look at our free research report of analyst consensus for EQM’s outlook.
- Valuation: What is EQM 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 EQM 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.
To help readers see pass 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.