Is Touchstone Exploration (TSE:TXP) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Touchstone Exploration Inc. (TSE:TXP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Touchstone Exploration

What Is Touchstone Exploration's Net Debt?

As you can see below, Touchstone Exploration had US$7.19m of debt at March 2021, down from US$13.0m a year prior. However, it does have US$15.5m in cash offsetting this, leading to net cash of US$8.26m.

How Healthy Is Touchstone Exploration's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Touchstone Exploration had liabilities of US$11.9m due within 12 months and liabilities of US$27.6m due beyond that. Offsetting this, it had US$15.5m in cash and US$6.14m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.9m.

Given Touchstone Exploration has a market capitalization of US$276.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Touchstone Exploration boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Touchstone Exploration's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Touchstone Exploration had a loss before interest and tax, and actually shrunk its revenue by 43%, to US$14m. To be frank that doesn't bode well.

So How Risky Is Touchstone Exploration?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Touchstone Exploration had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$18m of cash and made a loss of US$2.3m. Given it only has net cash of US$8.26m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Touchstone Exploration is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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