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While small-cap stocks, such as MGE Energy, Inc. (NASDAQ:MGEE) with its market cap of US$2.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into MGEE here.
MGEE’s Debt (And Cash Flows)
MGEE's debt levels surged from US$425m to US$522m over the last 12 months , which includes long-term debt. With this growth in debt, MGEE's cash and short-term investments stands at US$82m to keep the business going. Additionally, MGEE has generated cash from operations of US$159m during the same period of time, resulting in an operating cash to total debt ratio of 31%, indicating that MGEE’s current level of operating cash is high enough to cover debt.
Can MGEE pay its short-term liabilities?
Looking at MGEE’s US$112m in current liabilities, the company has been able to meet these commitments with a current assets level of US$221m, leading to a 1.97x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Electric Utilities 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.
Can MGEE service its debt comfortably?
MGEE is a relatively highly levered company with a debt-to-equity of 63%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MGEE's case, the ratio of 6.23x 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 MGEE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MGEE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MGE Energy to get a more holistic view of the small-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.
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.