Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as MGE Energy, Inc. (NASDAQ:MGEE), with a market capitalization of US$2.2b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at MGEE’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 MGEE here.
MGEE’s Debt (And Cash Flows)
MGEE’s debt levels surged from US$427m to US$511m over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$83m , ready to be used for running the business. On top of this, MGEE has generated US$153m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, signalling that MGEE’s debt is appropriately covered by operating cash.
Can MGEE pay its short-term liabilities?
With current liabilities at US$121m, it seems that the business has been able to meet these commitments with a current assets level of US$241m, leading to a 1.99x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Electric Utilities companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does MGEE face the risk of succumbing to its debt-load?
With debt reaching 63% of equity, MGEE may be thought of as relatively highly levered. 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 MGEE 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 MGEE’s, case, the ratio of 6.38x 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.
MGEE’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. Since there is also no concerns around MGEE’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how MGEE has been performing in the past. I recommend you continue to research MGE Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MGEE’s future growth? Take a look at our free research report of analyst consensus for MGEE’s outlook.
- Valuation: What is MGEE 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 MGEE 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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