Mid-caps stocks, like Peabody Energy Corporation (NYSE:BTU) with a market capitalization of US$3.1b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. BTU’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. Don’t forget that this is a general and concentrated examination of Peabody Energy's financial health, so you should conduct further analysis into BTU here.
Does BTU Produce Much Cash Relative To Its Debt?
BTU's debt levels have fallen from US$1.5b to US$1.4b over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$982m , ready to be used for running the business. Additionally, BTU has generated cash from operations of US$1.5b over the same time period, resulting in an operating cash to total debt ratio of 109%, signalling that BTU’s operating cash is sufficient to cover its debt.
Can BTU pay its short-term liabilities?
With current liabilities at US$1.1b, the company has been able to meet these commitments with a current assets level of US$2.0b, leading to a 1.85x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can BTU service its debt comfortably?
With debt at 40% of equity, BTU may be thought of as appropriately levered. This range is considered safe as BTU is not taking on too much debt obligation, which may be constraining for future growth. We can test if BTU’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BTU, the ratio of 5.19x 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.
BTU’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 BTU has company-specific issues impacting its capital structure decisions. You should continue to research Peabody Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BTU’s future growth? Take a look at our free research report of analyst consensus for BTU’s outlook.
- Valuation: What is BTU 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 BTU 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 firstname.lastname@example.org. 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.