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Stocks with market capitalization between $2B and $10B, such as Otter Tail Corporation (NASDAQ:OTTR) with a size of US$2.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at OTTR’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. Don’t forget that this is a general and concentrated examination of Otter Tail’s financial health, so you should conduct further analysis into OTTR here.
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OTTR’s Debt (And Cash Flows)
OTTR has built up its total debt levels in the last twelve months, from US$620m to US$655m – this includes long-term debt. With this growth in debt, OTTR's cash and short-term investments stands at US$891k , ready to be used for running the business. On top of this, OTTR has generated US$156m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24%, indicating that OTTR’s debt is appropriately covered by operating cash.
Can OTTR meet its short-term obligations with the cash in hand?
Looking at OTTR’s US$201m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electric Utilities companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is OTTR’s debt level acceptable?
With debt reaching 86% of equity, OTTR may be thought of as relatively highly levered. 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 OTTR 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 OTTR's, case, the ratio of 4.09x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.