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$3.1b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at NWE’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into NWE here.
How does NWE’s operating cash flow stack up against its debt?
Over the past year, NWE has maintained its debt levels at around US$2.0b made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$6m for investing into the business. On top of this, NWE has generated US$392m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19%, signalling that NWE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NWE’s case, it is able to generate 0.19x cash from its debt capital.
Can NWE pay its short-term liabilities?
Looking at NWE’s most recent US$300m liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$232m, leading to a current ratio of 0.77x.
Is NWE’s debt level acceptable?
NWE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if NWE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NWE, the ratio of 3.07x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NWE ample headroom to grow its debt facilities.
NWE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for NWE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research NorthWestern to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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 email@example.com.