Mid-caps stocks, like ONE Gas Inc (NYSE:OGS) with a market capitalization of US$4.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. OGS’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into OGS here.
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How does OGS’s operating cash flow stack up against its debt?
OGS has built up its total debt levels in the last twelve months, from US$1.4b to US$1.5b , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$12m for investing into the business. On top of this, OGS has produced cash from operations of US$388m in the last twelve months, leading to an operating cash to total debt ratio of 26%, meaning that OGS’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 OGS’s case, it is able to generate 0.26x cash from its debt capital.
Can OGS meet its short-term obligations with the cash in hand?
With current liabilities at US$836m, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$375m, leading to a current ratio of 0.45x.
Can OGS service its debt comfortably?
With debt reaching 73% of equity, OGS 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. 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 OGS’s case, the ratio of 5.99x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as OGS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although OGS’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven’t considered other factors such as how OGS has been performing in the past. You should continue to research ONE Gas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OGS’s future growth? Take a look at our free research report of analyst consensus for OGS’s outlook.
- Valuation: What is OGS 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 OGS 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 editorial-team@simplywallst.com.