Mid-caps stocks, like El Paso Electric Company (NYSE:EE) with a market capitalization of US$2.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine EE’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EE here.
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How much cash does EE generate through its operations?
Over the past year, EE has maintained its debt levels at around US$1.4b including long-term debt. At this current level of debt, EE’s cash and short-term investments stands at US$16m for investing into the business. Additionally, EE has generated cash from operations of US$291m in the last twelve months, leading to an operating cash to total debt ratio of 21%, indicating that EE’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 EE’s case, it is able to generate 0.21x cash from its debt capital.
Can EE pay its short-term liabilities?
With current liabilities at US$204m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$201m, with a current ratio of 0.98x.
Can EE service its debt comfortably?
Since total debt levels have outpaced equities, EE 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 EE 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 EE’s, case, the ratio of 3.64x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as EE’s high interest coverage is seen as responsible and safe practice.
Although EE’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. But, 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 EE has company-specific issues impacting its capital structure decisions. You should continue to research El Paso Electric to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EE’s future growth? Take a look at our free research report of analyst consensus for EE’s outlook.
- Valuation: What is EE 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 EE 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.