Mid-caps stocks, like MEG Energy Corp (TSE:MEG) with a market capitalization of CA$3.32b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at MEG’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. Don’t forget that this is a general and concentrated examination of MEG Energy’s financial health, so you should conduct further analysis into MEG here. View out our latest analysis for MEG Energy
Does MEG produce enough cash relative to debt?
MEG’s debt levels have fallen from CA$4.97b to CA$3.56b over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$675.12m , ready to deploy into the business. On top of this, MEG has produced cash from operations of CA$390.16m over the same time period, resulting in an operating cash to total debt ratio of 10.96%, meaning that MEG’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MEG’s case, it is able to generate 0.11x cash from its debt capital.
Can MEG meet its short-term obligations with the cash in hand?
Looking at MEG’s most recent CA$634.16m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$1.08b, with a current ratio of 1.7x. 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.
Does MEG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 86.53%, MEG can be considered as an above-average leveraged company. 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 MEG’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 MEG, the ratio of 0.15x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MEG’s low interest coverage already puts the company at higher risk of default.
MEG’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 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 MEG has been performing in the past. I suggest you continue to research MEG Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEG’s future growth? Take a look at our free research report of analyst consensus for MEG’s outlook.
- Valuation: What is MEG 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 MEG 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.