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Why Port of Tauranga Limited (NZSE:POT) Is A Financially Healthy Company

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Port of Tauranga Limited (NZSE:POT), with a market capitalization of NZ$3.5b, rarely draw their attention from the investing community. 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. Today we will look at POT’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into POT here.

Check out our latest analysis for Port of Tauranga

How much cash does POT generate through its operations?

POT’s debt levels surged from NZ$390m to NZ$417m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, POT currently has NZ$6m remaining in cash and short-term investments , ready to deploy into the business. Moreover, POT has generated NZ$99m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24%, meaning that POT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In POT’s case, it is able to generate 0.24x cash from its debt capital.

Does POT’s liquid assets cover its short-term commitments?

With current liabilities at NZ$321m, it appears that the company may not be able to easily meet these obligations given the level of current assets of NZ$58m, with a current ratio of 0.18x.

NZSE:POT Historical Debt November 12th 18
NZSE:POT Historical Debt November 12th 18

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

POT’s level of debt is appropriate relative to its total equity, at 37%. POT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if POT’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 POT, the ratio of 7.18x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as POT’s high interest coverage is seen as responsible and safe practice.

Next Steps:

POT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, 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 POT has been performing in the past. You should continue to research Port of Tauranga to get a more holistic view of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for POT’s future growth? Take a look at our free research report of analyst consensus for POT’s outlook.

  2. Valuation: What is POT 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 POT is currently mispriced by the market.

  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.

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.