Yahoo Finance Is Z Energy Limited (NZSE:ZEL) A Financially Sound Company?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Z Energy Limited (NZSE:ZEL), with a market cap of NZ$2.96b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at ZEL’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 Z Energy’s financial health, so you should conduct further analysis into ZEL here. See our latest analysis for Z Energy
How much cash does ZEL generate through its operations?
ZEL’s debt levels have fallen from NZ$1.04b to NZ$896.00m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, ZEL’s cash and short-term investments stands at NZ$72.00m for investing into the business. Moreover, ZEL has produced NZ$395.00m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 44.08%, signalling that ZEL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ZEL’s case, it is able to generate 0.44x cash from its debt capital.
Can ZEL pay its short-term liabilities?
Looking at ZEL’s most recent NZ$950.00m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of NZ$1.06b, with a current ratio of 1.12x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does ZEL face the risk of succumbing to its debt-load?
With total debt exceeding equities, ZEL is considered a highly levered 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 check to see whether ZEL 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 ZEL’s, case, the ratio of 7.96x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ZEL ample headroom to grow its debt facilities.
Next Steps:
Although ZEL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ZEL’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 ZEL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Z Energy to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ZEL’s future growth? Take a look at our free research report of analyst consensus for ZEL’s outlook.
Valuation: What is ZEL 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 ZEL 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 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.
