Mid-caps stocks, like CVR Energy, Inc. (NYSE:CVI) with a market capitalization of US$3.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at CVI’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of CVR Energy’s financial health, so you should conduct further analysis into CVI here.
Does CVI produce enough cash relative to debt?
CVI’s debt level has been constant at around US$1.2b over the previous year – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$702m , ready to deploy into the business. On top of this, CVI has produced US$359m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 31%, meaning that CVI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CVI’s case, it is able to generate 0.31x cash from its debt capital.
Can CVI meet its short-term obligations with the cash in hand?
Looking at CVI’s US$604m in current 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 2.3x. 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.
Does CVI face the risk of succumbing to its debt-load?
CVI is a relatively highly levered company with a debt-to-equity of 63%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CVI’s case, the ratio of 3.92x 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.
Although CVI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CVI has company-specific issues impacting its capital structure decisions. You should continue to research CVR Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CVI’s future growth? Take a look at our free research report of analyst consensus for CVI’s outlook.
- Valuation: What is CVI 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 CVI 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.