Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Southwestern Energy Company (NYSE:SWN) with a market-capitalization of US$2.3b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at SWN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 SWN here.
Does SWN Produce Much Cash Relative To Its Debt?
Over the past year, SWN has reduced its debt from US$4.4b to US$2.3b , which also accounts for long term debt. With this reduction in debt, SWN currently has US$202m remaining in cash and short-term investments , ready to be used for running the business. On top of this, SWN has produced cash from operations of US$1.2b over the same time period, leading to an operating cash to total debt ratio of 53%, meaning that SWN’s debt is appropriately covered by operating cash.
Does SWN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$846m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SWN face the risk of succumbing to its debt-load?
With debt reaching 98% of equity, SWN may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SWN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SWN’s, case, the ratio of 7.2x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although SWN’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 SWN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Southwestern Energy to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWN’s future growth? Take a look at our free research report of analyst consensus for SWN’s outlook.
- Historical Performance: What has SWN’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.
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