Would Touchstone Exploration (TSE:TXP) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Touchstone Exploration Inc. (TSE:TXP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Touchstone Exploration

What Is Touchstone Exploration's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Touchstone Exploration had debt of US$26.5m, up from US$25.5m in one year. However, it does have US$9.54m in cash offsetting this, leading to net debt of about US$16.9m.

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$39.7m due within 12 months and liabilities of US$46.5m due beyond that. Offsetting this, it had US$9.54m in cash and US$12.8m in receivables that were due within 12 months. So its liabilities total US$63.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$98.1m, so it does suggest shareholders should keep an eye on Touchstone Exploration's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Touchstone Exploration can strengthen its balance sheet over time. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to US$43m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Touchstone Exploration still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$18m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$4.7m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Touchstone Exploration .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.