Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Cenovus Energy Inc (TSE:CVE) with a market-capitalization of CA$12b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at CVE’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CVE here.
How does CVE’s operating cash flow stack up against its debt?
Over the past year, CVE has reduced its debt from CA$12b to CA$9.8b – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$1.9b , ready to deploy into the business. Additionally, CVE has produced cash from operations of CA$2.6b in the last twelve months, resulting in an operating cash to total debt ratio of 26%, signalling that CVE’s debt is appropriately covered by operating cash. 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 CVE’s case, it is able to generate 0.26x cash from its debt capital.
Does CVE’s liquid assets cover its short-term commitments?
Looking at CVE’s CA$4.7b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.26x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CVE face the risk of succumbing to its debt-load?
With debt reaching 53% of equity, CVE may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since CVE 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.
CVE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CVE’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CVE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Cenovus Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CVE’s future growth? Take a look at our free research report of analyst consensus for CVE’s outlook.
- Valuation: What is CVE 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 CVE 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 firstname.lastname@example.org.