Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Laredo Petroleum Inc (NYSE:LPI) with a market-capitalization of US$2.13b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at LPI’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 Laredo Petroleum’s financial health, so you should conduct further analysis into LPI here. View out our latest analysis for Laredo Petroleum
How much cash does LPI generate through its operations?
Over the past year, LPI has reduced its debt from US$1.35b to US$791.86m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$112.16m , ready to deploy into the business. On top of this, LPI has produced US$384.91m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 48.61%, meaning that LPI’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 LPI’s case, it is able to generate 0.49x cash from its debt capital.
Can LPI pay its short-term liabilities?
Looking at LPI’s most recent US$277.42m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of US$235.38m, with a current ratio of 0.85x below the prudent level of 3x.
Is LPI’s debt level acceptable?
LPI is a relatively highly levered company with a debt-to-equity of 89.96%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In LPI’s case, the ratio of 3.34x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving LPI ample headroom to grow its debt facilities.
LPI’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven’t considered other factors such as how LPI has been performing in the past. I suggest you continue to research Laredo Petroleum to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LPI’s future growth? Take a look at our free research report of analyst consensus for LPI’s outlook.
- Valuation: What is LPI 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 LPI 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.