Stocks with market capitalization between $2B and $10B, such as Whitehaven Coal Limited (ASX:WHC) with a size of AU$4.93b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at WHC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WHC here.
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How much cash does WHC generate through its operations?
Over the past year, WHC has maintained its debt levels at around AU$382.47m comprising of short- and long-term debt. At this constant level of debt, WHC's cash and short-term investments stands at AU$111.78m , ready to deploy into the business. Additionally, WHC has generated AU$831.48m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 217.40%, signalling that WHC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WHC’s case, it is able to generate 2.17x cash from its debt capital.
Can WHC meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$288.95m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.17x. 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.
Is WHC’s debt level acceptable?
WHC’s level of debt is appropriate relative to its total equity, at 10.96%. This range is considered safe as WHC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if WHC’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 WHC, the ratio of 65.19x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as WHC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
WHC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how WHC has been performing in the past. You should continue to research Whitehaven Coal to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WHC’s future growth? Take a look at our free research report of analyst consensus for WHC’s outlook.
- Valuation: What is WHC 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 WHC 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 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.