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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as TransAlta Renewables Inc. (TSE:RNW) with a market-capitalization of CA$3.6b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. RNW’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RNW here.
RNW’s Debt (And Cash Flows)
Over the past year, RNW has reduced its debt from CA$1.0b to CA$963m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$69m , ready to be used for running the business. Moreover, RNW has produced cash from operations of CA$384m during the same period of time, leading to an operating cash to total debt ratio of 40%, indicating that RNW’s operating cash is sufficient to cover its debt.
Can RNW meet its short-term obligations with the cash in hand?
Looking at RNW’s CA$159m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CA$322m, leading to a 2.03x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Renewable Energy 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 RNW face the risk of succumbing to its debt-load?
RNW’s level of debt is appropriate relative to its total equity, at 40%. RNW is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
RNW’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how RNW has been performing in the past. I recommend you continue to research TransAlta Renewables to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RNW’s future growth? Take a look at our free research report of analyst consensus for RNW’s outlook.
- Valuation: What is RNW 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 RNW 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.