Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Tallgrass Energy Partners LP (NYSE:TEP), with a market capitalization of US$3.51b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine TEP’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TEP here.
Does TEP produce enough cash relative to debt?
TEP’s debt levels surged from US$1.96b to US$2.30b over the last 12 months , which is made up of current and long term debt. With this increase in debt, TEP’s cash and short-term investments stands at US$4.07m for investing into the business. On top of this, TEP has generated US$613.38m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 26.65%, indicating that TEP’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TEP’s case, it is able to generate 0.27x cash from its debt capital.
Can TEP meet its short-term obligations with the cash in hand?
With current liabilities at US$290.43m, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.63x, which is below the prudent industry ratio of 3x.
Does TEP face the risk of succumbing to its debt-load?
With total debt exceeding equities, TEP is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 TEP’s case, the ratio of 2.94x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
TEP’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for TEP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Tallgrass Energy Partners to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TEP’s future growth? Take a look at our free research report of analyst consensus for TEP’s outlook.
- Valuation: What is TEP 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 TEP 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.