Yahoo Finance Does Seven Generations Energy Ltd.’s (TSE:VII) Debt Level Pose A Problem?
Stocks with market capitalization between $2B and $10B, such as Seven Generations Energy Ltd. (TSE:VII) with a size of CA$3.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. VII’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into VII here.
View our latest analysis for Seven Generations Energy
How does VII’s operating cash flow stack up against its debt?
VII’s debt level has been constant at around CA$2.0b over the previous year which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$101m for investing into the business. Moreover, VII has produced CA$1.7b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 84%, signalling that VII’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 VII’s case, it is able to generate 0.84x cash from its debt capital.
Does VII’s liquid assets cover its short-term commitments?
Looking at VII’s CA$629m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.69x.
Can VII service its debt comfortably?
With a debt-to-equity ratio of 43%, VII 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 VII’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 VII, the ratio of 5.1x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VII’s high interest coverage is seen as responsible and safe practice.
Next Steps:
VII’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. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for VII’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Seven Generations Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for VII’s future growth? Take a look at our free research report of analyst consensus for VII’s outlook.
Valuation: What is VII 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 VII 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.
