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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Whitehaven Coal Limited (ASX:WHC), with a market capitalization of AU$5.22b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at WHC’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 Whitehaven Coal’s financial health, so you should conduct further analysis into WHC here.
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Does WHC produce enough cash relative to debt?
WHC’s debt levels have fallen from AU$735.46m to AU$245.94m over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$98.61m , ready to deploy into the business. Moreover, WHC has produced cash from operations of AU$769.83m during the same period of time, leading to an operating cash to total debt ratio of 313.02%, indicating that WHC’s operating cash is sufficient to cover its debt. 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 3.13x cash from its debt capital.
Does WHC’s liquid assets cover its short-term commitments?
Looking at WHC’s most recent AU$228.42m liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$321.37m, leading to a 1.41x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is WHC’s debt level acceptable?
With a debt-to-equity ratio of 7.34%, WHC’s debt level is relatively low. WHC is not taking on too much debt commitment, which may be constraining for future growth. 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 21.19x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WHC ample headroom to grow its debt facilities.
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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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure WHC has company-specific issues impacting its capital structure decisions. You should continue to research Whitehaven Coal to get a more holistic view of the stock by looking at: