Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Southwest Gas Holdings, Inc. (NYSE:SWX), with a market cap of US$3.9b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine SWX’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SWX here.
How much cash does SWX generate through its operations?
SWX has built up its total debt levels in the last twelve months, from US$1.9b to US$2.2b , which includes long-term debt. With this increase in debt, SWX’s cash and short-term investments stands at US$69m , ready to deploy into the business. Additionally, SWX has generated US$478m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 22%, meaning that SWX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SWX’s case, it is able to generate 0.22x cash from its debt capital.
Can SWX pay its short-term liabilities?
Looking at SWX’s US$713m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. For Gas Utilities companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SWX service its debt comfortably?
SWX 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. 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 SWX’s case, the ratio of 3.92x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SWX’s high interest coverage is seen as responsible and safe practice.
SWX’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SWX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Southwest Gas Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWX’s future growth? Take a look at our free research report of analyst consensus for SWX’s outlook.
- Historical Performance: What has SWX’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.