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Is NorthWestern Corporation (NYSE:NWE) A Financially Sound Company?

Simply Wall St

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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as NorthWestern Corporation (NYSE:NWE) with a market-capitalization of US$3.7b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. NWE’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NWE here.

Check out our latest analysis for NorthWestern

NWE’s Debt (And Cash Flows)

Over the past year, NWE has maintained its debt levels at around US$2.1b including long-term debt. At this current level of debt, NWE's cash and short-term investments stands at US$4.0m , ready to be used for running the business. On top of this, NWE has produced cash from operations of US$320m over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that NWE’s debt is not covered by operating cash.

Can NWE meet its short-term obligations with the cash in hand?

At the current liabilities level of US$347m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$288m, with a current ratio of 0.83x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:NWE Historical Debt, July 18th 2019

Can NWE service its debt comfortably?

NWE is a highly-leveraged company with debt exceeding equity by over 100%. 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 NWE's case, the ratio of 3x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NWE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although NWE’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how NWE has been performing in the past. You should continue to research NorthWestern to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NWE’s future growth? Take a look at our free research report of analyst consensus for NWE’s outlook.
  2. Valuation: What is NWE 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 NWE is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.