Stocks with market capitalization between $2B and $10B, such as Whitehaven Coal Limited (ASX:WHC) with a size of A$4.67B, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at WHC’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into WHC here. View our latest analysis for Whitehaven Coal

Does WHC generate enough cash through operations?

Over the past year, WHC has reduced its debt from A$941.8M to A$398.9M , which comprises of short- and long-term debt. With this reduction in debt, WHC currently has A$87.1M remaining in cash and short-term investments , ready to deploy into the business. Additionally, WHC has generated A$607.6M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 152.35%, meaning that WHC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WHC’s case, it is able to generate 1.52x cash from its debt capital.

Does WHC’s liquid assets cover its short-term commitments?

With current liabilities at A$215.5M, the company has been able to meet these commitments with a current assets level of A$302.0M, leading to a 1.4x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does WHC face the risk of succumbing to its debt-load?

With debt at 12.12% of equity, WHC may be thought of as appropriately levered. WHC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if WHC’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 WHC, the ratio of 12.03x suggests that interest is comfortably 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.

Next Steps:

WHC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure WHC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Whitehaven Coal to get a better picture of the stock by looking at:

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

• 2. Valuation: What is WHC 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 WHC 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 pass 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.