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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Centrica plc ( LON:CNA ), with a market cap of UK£5.1b, are often out of the spotlight. 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 CNA’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CNA here .
Does CNA Produce Much Cash Relative To Its Debt?
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 payback, the current cash and short-term investment levels stands at UK£1.3b to keep the business going. On top of this, CNA has generated UK£1.9b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41%, signalling that CNA’s operating cash is sufficient to cover its debt.
Can CNA meet its short-term obligations with the cash in hand?
Looking at CNA’s UK£8.4b in current liabilities, it appears that 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 calculated by dividing current assets by current liabilities. Usually, for Integrated Utilities companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is CNA’s debt level acceptable?
Since total debt growth have outpaced equity growth, CNA is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 debtors may be willing to loan the company more money, giving CNA ample headroom to grow its debt facilities.
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. This is only a rough assessment of financial health, and I'm sure CNA has company-specific issues impacting its capital structure decisions. I suggest 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 email@example.com . 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.