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Stocks with market capitalization between $2B and $10B, such as Spire Inc. (NYSE:SR) with a size of US$4.0b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. SR’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 SR here.
How does SR’s operating cash flow stack up against its debt?
Over the past year, SR has maintained its debt levels at around US$2.6b – this includes long-term debt. At this constant level of debt, SR’s cash and short-term investments stands at US$4.4m for investing into the business. On top of this, SR has generated cash from operations of US$457m over the same time period, resulting in an operating cash to total debt ratio of 17%, meaning that SR’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SR’s case, it is able to generate 0.17x cash from its debt capital.
Does SR’s liquid assets cover its short-term commitments?
With current liabilities at US$1.3b, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$660m, with a current ratio of 0.5x.
Is SR’s debt level acceptable?
With total debt exceeding equities, SR 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. We can test if SR’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 SR, the ratio of 2.84x 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.
SR’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 SR’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Spire to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SR’s future growth? Take a look at our free research report of analyst consensus for SR’s outlook.
- Historical Performance: What has SR’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.
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 email@example.com.