Is Genesis Energy LP's (NYSE:GEL) 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 Genesis Energy LP (NYSE:GEL), with a market cap of US$2.97b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at GEL’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 GEL here.

View our latest analysis for Genesis Energy

Does GEL produce enough cash relative to debt?

GEL's debt levels surged from US$3.03b to US$3.76b over the last 12 months , which is made up of current and long term debt. With this growth in debt, GEL's cash and short-term investments stands at US$7.8m for investing into the business. Additionally, GEL has generated cash from operations of US$313.4m in the last twelve months, leading to an operating cash to total debt ratio of 8.3%, signalling that GEL’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In GEL’s case, it is able to generate 0.083x cash from its debt capital.

Can GEL meet its short-term obligations with the cash in hand?

With current liabilities at US$384.2m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is GEL’s debt level acceptable?

With total debt exceeding equities, GEL is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since GEL is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

GEL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for GEL's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Genesis Energy to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GEL’s future growth? Take a look at our free research report of analyst consensus for GEL’s outlook.
2. Historical Performance: What has GEL'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.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.