Is Southwestern Energy Company’s (NYSE:SWN) Balance Sheet A Threat To Its Future?
Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Southwestern Energy Company (NYSE:SWN), with a market cap of US$3.18b, often get neglected by retail investors. 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. This article will examine SWN’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. Don’t forget that this is a general and concentrated examination of Southwestern Energy’s financial health, so you should conduct further analysis into SWN here. See our latest analysis for Southwestern Energy
How does SWN’s operating cash flow stack up against its debt?
SWN’s debt levels have fallen from US$4.66b to US$4.39b over the last 12 months , which is made up of current and long term debt. With this reduction in debt, SWN currently has US$916.00m remaining in cash and short-term investments , ready to deploy into the business. On top of this, SWN has generated US$1.10b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24.98%, indicating that SWN’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 SWN’s case, it is able to generate 0.25x cash from its debt capital.
Can SWN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$780.00m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.51b, with a current ratio of 1.93x. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can SWN service its debt comfortably?
Since total debt levels have outpaced equities, SWN 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. 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 7.32x 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.
Next Steps:
At its current level of cash flow coverage, SWN has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how SWN has been performing in the past. I suggest you continue to research Southwestern Energy to get a more holistic view of the stock 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.
Valuation: What is SWN 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 SWN 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.