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, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. MGEE’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MGEE here.
Does MGEE produce enough cash relative to debt?
MGEE’s debt levels surged from US$395m to US$449m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, MGEE currently has US$96m remaining in cash and short-term investments for investing into the business. Additionally, MGEE has produced US$158m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 35%, signalling that MGEE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MGEE’s case, it is able to generate 0.35x cash from its debt capital.
Can MGEE pay its short-term liabilities?
At the current liabilities level of US$118m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$242m, with a current ratio of 2.05x. Usually, for Electric Utilities companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MGEE’s debt level acceptable?
With a debt-to-equity ratio of 57%, MGEE can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 MGEE’s case, the ratio of 6.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MGEE ample headroom to grow its debt facilities.
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. This is only a rough assessment of financial health, and I’m sure MGEE has company-specific issues impacting its capital structure decisions. You should continue to research MGE Energy to get a more holistic view 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.
- Historical Performance: What has MGEE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.