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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Cleanaway Waste Management Limited (ASX:CWY), with a market cap of AU$4.6b, 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. Let’s take a look at CWY’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CWY here.
CWY’s Debt (And Cash Flows)
Over the past year, CWY has ramped up its debt from AU$39m to AU$709m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$45m to keep the business going. On top of this, CWY has produced AU$284m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 40%, indicating that CWY’s current level of operating cash is high enough to cover debt.
Can CWY meet its short-term obligations with the cash in hand?
With current liabilities at AU$458m, it seems that the business has been able to meet these commitments with a current assets level of AU$479m, leading to a 1.05x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CWY’s debt level acceptable?
With debt at 28% of equity, CWY may be thought of as appropriately levered. This range is considered safe as CWY is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether CWY 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 CWY's, case, the ratio of 7.75x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
CWY’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure CWY has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cleanaway Waste Management to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CWY’s future growth? Take a look at our free research report of analyst consensus for CWY’s outlook.
- Valuation: What is CWY 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 CWY 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 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.