Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Southwestern Energy Company (NYSE:SWN), with a market cap of US$2.4b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at SWN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SWN here.
SWN’s Debt (And Cash Flows)
SWN has shrunk its total debt levels in the last twelve months, from US$4.4b to US$2.3b – this includes long-term debt. With this debt payback, SWN currently has US$202m remaining in cash and short-term investments , ready to be used for running the business. Moreover, SWN has generated cash from operations of US$1.2b in the last twelve months, resulting in an operating cash to total debt ratio of 53%, indicating that SWN’s operating cash is sufficient to cover its debt.
Does SWN’s liquid assets cover its short-term commitments?
With current liabilities at US$846m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SWN’s debt level acceptable?
With debt reaching 98% of equity, SWN 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. We can test if SWN’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 SWN, the ratio of 7.2x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SWN’s high interest coverage is seen as responsible and safe practice.
Although SWN’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 SWN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Southwestern Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWN’s future growth? Take a look at our free research report of analyst consensus for SWN’s outlook.
- Historical Performance: What has SWN’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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