Yahoo Finance Is Contact Energy Limited (NZSE:CEN) A Financially Sound Company?
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Stocks with market capitalization between $2B and $10B, such as Contact Energy Limited (NZSE:CEN) with a size of NZ$5.6b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. Let’s take a look at CEN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CEN here.
See our latest analysis for Contact Energy
CEN’s Debt (And Cash Flows)
Over the past year, CEN has reduced its debt from NZ$1.6b to NZ$1.2b , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at NZ$210m to keep the business going. Moreover, CEN has produced cash from operations of NZ$509m in the last twelve months, leading to an operating cash to total debt ratio of 42%, signalling that CEN’s operating cash is sufficient to cover its debt.
Can CEN pay its short-term liabilities?
At the current liabilities level of NZ$611m, it appears that the company may not have an easy time meeting these commitments with a current assets level of NZ$446m, leading to a current ratio of 0.73x. The current ratio is the number you get when you divide current assets by current liabilities.
Can CEN service its debt comfortably?
With debt reaching 42% of equity, CEN 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 CEN's case, the ratio of 3.74x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CEN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although CEN’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 lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven't considered other factors such as how CEN has been performing in the past. You should continue to research Contact Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CEN’s future growth? Take a look at our free research report of analyst consensus for CEN’s outlook.
Valuation: What is CEN 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 CEN 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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