Is WEC Energy Group, Inc.'s (NYSE:WEC) Balance Sheet A Threat To Its Future?
There are a number of reasons that attract investors towards large-cap companies such as WEC Energy Group, Inc. (NYSE:WEC), with a market cap of US$27b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. Today we will look at WEC Energy Group’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into WEC here.
View our latest analysis for WEC Energy Group
Does WEC Produce Much Cash Relative To Its Debt?
Over the past year, WEC has ramped up its debt from US$11b to US$12b , which includes long-term debt. With this rise in debt, WEC currently has US$31m remaining in cash and short-term investments to keep the business going. Moreover, WEC has generated US$2.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 19%, signalling that WEC’s operating cash is less than its debt.
Can WEC pay its short-term liabilities?
Looking at WEC’s US$2.9b in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.69x. The current ratio is calculated by dividing current assets by current liabilities.
Can WEC service its debt comfortably?
With total debt exceeding equities, WEC Energy Group is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if WEC’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 WEC, the ratio of 3.22x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as WEC is a safe investment.
Next Steps:
WEC’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven't considered other factors such as how WEC has been performing in the past. I recommend you continue to research WEC Energy Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WEC’s future growth? Take a look at our free research report of analyst consensus for WEC’s outlook.
Historical Performance: What has WEC'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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