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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Black Hills Corporation (NYSE:BKH), with a market capitalization of US$4.8b, 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 BKH’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. Don’t forget that this is a general and concentrated examination of Black Hills’s financial health, so you should conduct further analysis into BKH here.
BKH’s Debt (And Cash Flows)
Over the past year, BKH has maintained its debt levels at around US$3.1b which accounts for long term debt. At this stable level of debt, BKH currently has US$12m remaining in cash and short-term investments , ready to be used for running the business. Moreover, BKH has produced cash from operations of US$495m in the last twelve months, resulting in an operating cash to total debt ratio of 16%, indicating that BKH’s current level of operating cash is not high enough to cover debt.
Can BKH meet its short-term obligations with the cash in hand?
Looking at BKH’s US$591m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$485m, leading to a current ratio of 0.82x. The current ratio is calculated by dividing current assets by current liabilities.
Does BKH face the risk of succumbing to its debt-load?
With total debt exceeding equity, BKH is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In BKH's case, the ratio of 2.84x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
BKH’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. But, 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 BKH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Black Hills to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BKH’s future growth? Take a look at our free research report of analyst consensus for BKH’s outlook.
- Valuation: What is BKH 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 BKH 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.