Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Meridian Energy Limited (NZSE:MEL), with a market capitalization of NZ$8.33b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine MEL’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. Don’t forget that this is a general and concentrated examination of Meridian Energy's financial health, so you should conduct further analysis into MEL here.
Does MEL produce enough cash relative to debt?
MEL has built up its total debt levels in the last twelve months, from NZ$1.28b to NZ$1.41b – this includes both the current and long-term debt. With this growth in debt, MEL's cash and short-term investments stands at NZ$108.00m , ready to deploy into the business. Moreover, MEL has produced NZ$429.00m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 30.34%, signalling that MEL’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 MEL’s case, it is able to generate 0.3x cash from its debt capital.
Can MEL pay its short-term liabilities?
With current liabilities at NZ$624.00m, it seems that the business is not able to meet these obligations given the level of current assets of NZ$553.00m, with a current ratio of 0.89x below the prudent level of 3x.
Can MEL service its debt comfortably?
With a debt-to-equity ratio of 28.66%, MEL's debt level may be seen as prudent. This range is considered safe as MEL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if MEL’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 MEL, the ratio of 3.99x suggests that interest is appropriately 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.
MEL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure MEL has company-specific issues impacting its capital structure decisions. You should continue to research Meridian Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEL’s future growth? Take a look at our free research report of analyst consensus for MEL’s outlook.
- Valuation: What is MEL 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 MEL 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.