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$2.77b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. 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. Don’t forget that this is a general and concentrated examination of NorthWestern’s financial health, so you should conduct further analysis into NWE here. Check out our latest analysis for NorthWestern
Does NWE produce enough cash relative to debt?
NWE has sustained its debt level by about US$2.14b over the last 12 months comprising of short- and long-term debt. At this current level of debt, NWE’s cash and short-term investments stands at US$8.47m for investing into the business. Additionally, NWE has produced US$323.61m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15.14%, signalling that NWE’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NWE’s case, it is able to generate 0.15x cash from its debt capital.
Does NWE’s liquid assets cover its short-term commitments?
Looking at NWE’s most recent US$632.24m liabilities, the company is not able to meet these obligations given the level of current assets of US$296.36m, with a current ratio of 0.47x below the prudent level of 3x.
Is NWE’s debt level acceptable?
Since total debt levels have outpaced equities, NWE is a highly leveraged 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 NWE’s case, the ratio of 2.81x 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.
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. 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:
- 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 pass 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.