Atmos Energy Corporation (NYSE:ATO): Time For A Financial Health Check

Simply Wall St

Sun, Jun 9, 2019, 8:06 AM

There are a number of reasons that attract investors towards large-cap companies such as Atmos Energy Corporation (NYSE:ATO), with a market cap of US$12b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Atmos Energy’s leverage and assess its financial strength 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 ATO here.

View our latest analysis for Atmos Energy

ATO’s Debt (And Cash Flows)

ATO has built up its total debt levels in the last twelve months, from US$3.3b to US$3.7b – this includes long-term debt. With this growth in debt, ATO's cash and short-term investments stands at US$108m to keep the business going. On top of this, ATO has generated cash from operations of US$934m in the last twelve months, leading to an operating cash to total debt ratio of 26%, signalling that ATO’s debt is appropriately covered by operating cash.

Can ATO meet its short-term obligations with the cash in hand?

With current liabilities at US$864m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is calculated by dividing current assets by current liabilities.

Is ATO’s debt level acceptable?

ATO is a relatively highly levered company with a debt-to-equity of 66%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if ATO’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In ATO's case, the ratio of 7.32x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ATO and other large-cap investments thought to be safe.