Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Matador Resources Company (NYSE:MTDR), with a market capitalization of US$2.3b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at MTDR’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MTDR here.
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MTDR’s Debt (And Cash Flows)
MTDR's debt levels surged from US$574m to US$1.5b over the last 12 months – this includes long-term debt. With this growth in debt, MTDR's cash and short-term investments stands at US$21m , ready to be used for running the business. On top of this, MTDR has generated cash from operations of US$532m in the last twelve months, resulting in an operating cash to total debt ratio of 36%, meaning that MTDR’s current level of operating cash is high enough to cover debt.
Can MTDR meet its short-term obligations with the cash in hand?
Looking at MTDR’s US$328m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$230m, with a current ratio of 0.7x. The current ratio is calculated by dividing current assets by current liabilities.
Is MTDR’s debt level acceptable?
With a debt-to-equity ratio of 81%, MTDR 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. We can check to see whether MTDR 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 MTDR's, case, the ratio of 5.86x 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.
Although MTDR’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. 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 MTDR has company-specific issues impacting its capital structure decisions. You should continue to research Matador Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MTDR’s future growth? Take a look at our free research report of analyst consensus for MTDR’s outlook.
- Valuation: What is MTDR 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 MTDR 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.
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