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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Centrica plc ( LON:CNA ), with a market cap of UK£5.1b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at CNA’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CNA here .
CNA’s Debt (And Cash Flows)
CNA's debt levels have fallen from UK£6.3b to UK£4.8b over the last 12 months – this includes long-term debt. With this debt repayment, CNA's cash and short-term investments stands at UK£1.3b , ready to be used for running the business. Moreover, CNA has produced UK£1.9b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 41%, meaning that CNA’s debt is appropriately covered by operating cash.
Can CNA meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£8.4b, the company has been able to meet these commitments with a current assets level of UK£8.7b, leading to a 1.03x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Integrated Utilities companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CNA face the risk of succumbing to its debt-load?
CNA 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. We can check to see whether CNA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CNA's, case, the ratio of 5.61x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CNA’s high interest coverage is seen as responsible and safe practice.
Although CNA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CNA's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Centrica to get a more holistic view of the mid-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for CNA’s future growth? Take a look at our free research report of analyst consensus for CNA’s outlook.
- Valuation : What is CNA 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 CNA 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 .
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.