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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Husky Energy Inc. (TSE:HSE), with a market capitalization of CA$13b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine HSE’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HSE here.
HSE’s Debt (And Cash Flows)
HSE has built up its total debt levels in the last twelve months, from CA$6.0b to CA$8.4b , which accounts for long term debt. With this increase in debt, HSE currently has CA$3.2b remaining in cash and short-term investments to keep the business going. Moreover, HSE has generated CA$4.2b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 49%, signalling that HSE’s operating cash is sufficient to cover its debt.
Can HSE meet its short-term obligations with the cash in hand?
Looking at HSE’s CA$5.6b 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 1.17x. The current ratio is the number you get when you divide current assets by current liabilities. 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 HSE face the risk of succumbing to its debt-load?
With debt reaching 43% of equity, HSE may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if HSE’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 HSE, the ratio of 11.08x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
HSE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for HSE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Husky Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HSE’s future growth? Take a look at our free research report of analyst consensus for HSE’s outlook.
- Valuation: What is HSE 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 HSE 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 email@example.com. 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.