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Stocks with market capitalization between $2B and $10B, such as Southwest Gas Holdings, Inc. (NYSE:SWX) with a size of US$4.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. SWX’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SWX here.
SWX’s Debt (And Cash Flows)
SWX's debt levels surged from US$2.0b to US$2.3b over the last 12 months – this includes long-term debt. With this growth in debt, SWX's cash and short-term investments stands at US$97m to keep the business going. Additionally, SWX has generated US$536m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 23%, signalling that SWX’s debt is appropriately covered by operating cash.
Can SWX pay its short-term liabilities?
With current liabilities at US$974m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$830m, leading to a current ratio of 0.85x. The current ratio is the number you get when you divide current assets by current liabilities.
Is SWX’s debt level acceptable?
With a debt-to-equity ratio of 96%, SWX can be considered as an above-average leveraged 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 SWX's case, the ratio of 3.78x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SWX’s high interest coverage is seen as responsible and safe practice.
SWX’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how SWX has been performing in the past. I recommend you continue to research Southwest Gas Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWX’s future growth? Take a look at our free research report of analyst consensus for SWX’s outlook.
- Historical Performance: What has SWX'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.
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 email@example.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.