Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Tourmaline Oil Corp. (TSE:TOU), with a market cap of CA$5.7b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at TOU’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TOU here.
Check out our latest analysis for Tourmaline Oil
Does TOU Produce Much Cash Relative To Its Debt?
Over the past year, TOU has maintained its debt levels at around CA$1.5b – this includes long-term debt. At this stable level of debt, TOU’s cash and short-term investments stands at CA$35m , ready to be used for running the business. On top of this, TOU has produced CA$1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 86%, indicating that TOU’s operating cash is sufficient to cover its debt.
Can TOU meet its short-term obligations with the cash in hand?
With current liabilities at CA$542m, the company may not be able to easily meet these obligations given the level of current assets of CA$314m, with a current ratio of 0.58x. The current ratio is calculated by dividing current assets by current liabilities.
Is TOU’s debt level acceptable?
With debt at 20% of equity, TOU may be thought of as appropriately levered. This range is considered safe as TOU is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether TOU 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 TOU’s, case, the ratio of 10.09x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
TOU’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how TOU has been performing in the past. I suggest you continue to research Tourmaline Oil to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TOU’s future growth? Take a look at our free research report of analyst consensus for TOU’s outlook.
- Valuation: What is TOU 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 TOU 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.