Yahoo Finance Is Cenovus Energy Inc.’s (TSE:CVE) Balance Sheet Strong Enough To Weather A Storm?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Cenovus Energy Inc. (TSE:CVE), with a market cap of CA$11b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at CVE’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CVE here.
See our latest analysis for Cenovus Energy
Does CVE produce enough cash relative to debt?
Over the past year, CVE has reduced its debt from CA$12b to CA$9.8b , which includes long-term debt. With this reduction in debt, CVE’s cash and short-term investments stands at CA$1.9b for investing into the business. Additionally, CVE has produced cash from operations of CA$2.6b during the same period of time, leading to an operating cash to total debt ratio of 26%, signalling that CVE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In CVE’s case, it is able to generate 0.26x cash from its debt capital.
Can CVE pay its short-term liabilities?
With current liabilities at CA$4.7b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.26x. 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.
Does CVE face the risk of succumbing to its debt-load?
With debt reaching 53% of equity, CVE may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CVE is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
CVE’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 CVE’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CVE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cenovus Energy to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CVE’s future growth? Take a look at our free research report of analyst consensus for CVE’s outlook.
Valuation: What is CVE 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 CVE is currently mispriced by the market.
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.
