Concho Resources Inc. (NYSE:CXO), a large-cap worth US$22b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for CXO to determine is solvency and liquidity and whether the stock is a sound investment.
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How much cash does CXO generate through its operations?
CXO’s debt levels surged from US$2.8b to US$4.2b over the last 12 months , which accounts for long term debt. With this increase in debt, CXO currently has US$24m remaining in cash and short-term investments for investing into the business. Moreover, CXO has generated cash from operations of US$2.4b over the same time period, leading to an operating cash to total debt ratio of 56%, indicating that CXO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CXO’s case, it is able to generate 0.56x cash from its debt capital.
Can CXO pay its short-term liabilities?
At the current liabilities level of US$1.9b, the company may not have an easy time meeting these commitments with a current assets level of US$1.0b, leading to a current ratio of 0.55x.
Can CXO service its debt comfortably?
With debt at 25% of equity, CXO may be thought of as appropriately levered. CXO is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CXO is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For CXO, the ratio of 4.39x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as CXO is a safe investment.
CXO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for CXO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Concho Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CXO’s future growth? Take a look at our free research report of analyst consensus for CXO’s outlook.
- Valuation: What is CXO 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 CXO 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 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 email@example.com.