While small-cap stocks, such as Touchstone Exploration Inc (TSE:TXP) with its market cap of CA$43.33m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TXP here.
How much cash does TXP generate through its operations?
Over the past year, TXP has maintained its debt levels at around CA$13.61m – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CA$10.56m , ready to deploy into the business. Additionally, TXP has generated cash from operations of CA$6.74m in the last twelve months, leading to an operating cash to total debt ratio of 49.56%, signalling that TXP’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 TXP’s case, it is able to generate 0.5x cash from its debt capital.
Can TXP pay its short-term liabilities?
Looking at TXP’s most recent CA$18.83m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$22.56m, with a current ratio of 1.2x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TXP face the risk of succumbing to its debt-load?
With debt at 33.80% of equity, TXP may be thought of as appropriately levered. This range is considered safe as TXP is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TXP’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 TXP, the ratio of 9.65x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TXP ample headroom to grow its debt facilities.Next Steps:
TXP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure TXP has company-specific issues impacting its capital structure decisions. You should continue to research Touchstone Exploration to get a more holistic view of the stock by looking at:
- Historical Performance: What has TXP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.