Aqua America Inc (NYSE:WTR): Time For A Financial Health Check

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Aqua America Inc (NYSE:WTR) with a market-capitalization of US$6.25b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at WTR’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into WTR here. Check out our latest analysis for Aqua America

Does WTR produce enough cash relative to debt?

WTR has built up its total debt levels in the last twelve months, from US$1.94b to US$2.20b – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$3.20m for investing into the business. Moreover, WTR has produced US$388.47m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 17.66%, indicating that WTR’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 WTR’s case, it is able to generate 0.18x cash from its debt capital.

Can WTR pay its short-term liabilities?

Looking at WTR’s most recent US$259.14m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of US$124.14m, with a current ratio of 0.48x below the prudent level of 3x.

Does WTR face the risk of succumbing to its debt-load?

WTR is a highly-leveraged company with debt exceeding equity by over 100%. 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 WTR's case, the ratio of 3.62x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

WTR’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, 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 WTR has been performing in the past. You should continue to research Aqua America to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for WTR’s future growth? Take a look at our free research report of analyst consensus for WTR’s outlook.
2. Historical Performance: What has WTR'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.
3. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.