Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Black Hills Corporation (NYSE:BKH), with a market capitalization of US$4.3b, rarely draw their attention from the investing community. 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. This article will examine BKH’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 BKH here.
BKH’s Debt (And Cash Flows)
BKH’s debt levels have fallen from US$3.3b to US$3.1b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$21m to keep the business going. On top of this, BKH has produced cash from operations of US$489m in the last twelve months, leading to an operating cash to total debt ratio of 16%, meaning that BKH’s operating cash is less than its debt.
Can BKH pay its short-term liabilities?
With current liabilities at US$648m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is calculated by dividing current assets by current liabilities.
Is BKH’s debt level acceptable?
Since total debt growth have outpaced equity growth, BKH is a highly 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 check to see whether BKH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BKH’s, case, the ratio of 2.77x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BKH’s low interest coverage already puts the company at higher risk of default.
Although BKH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. 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 BKH has company-specific issues impacting its capital structure decisions. You should continue to research Black Hills to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BKH’s future growth? Take a look at our free research report of analyst consensus for BKH’s outlook.
- Valuation: What is BKH 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 BKH 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.
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