Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Beach Energy Limited (ASX:BPT), with a market cap of AU$3.5b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine BPT’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Beach Energy’s financial health, so you should conduct further analysis into BPT here.

Check out our latest analysis for Beach Energy

How much cash does BPT generate through its operations?

Over the past year, BPT has ramped up its debt from AU$148m to AU$926m – this includes long-term debt. With this growth in debt, BPT’s cash and short-term investments stands at AU$311m , ready to deploy into the business. Additionally, BPT has generated cash from operations of AU$663m over the same time period, resulting in an operating cash to total debt ratio of 72%, meaning that BPT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BPT’s case, it is able to generate 0.72x cash from its debt capital.

Can BPT pay its short-term liabilities?

Looking at BPT’s AU$483m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Can BPT service its debt comfortably?

With a debt-to-equity ratio of 50%, BPT can be considered as an above-average 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 test if BPT’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 BPT, the ratio of 31.41x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BPT ample headroom to grow its debt facilities.

Next Steps:

BPT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around BPT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BPT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Beach Energy to get a better picture of the mid-cap by looking at:

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

2. Valuation: What is BPT 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 BPT 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.