Investors are always looking for growth in small-cap stocks like WPX Energy, Inc. (NYSE:WPX), with a market cap of US$4.8b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I recommend you dig deeper yourself into WPX here.
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WPX’s Debt (And Cash Flows)
Over the past year, WPX has maintained its debt levels at around US$2.6b – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$6.0m , ready to be used for running the business. Additionally, WPX has produced cash from operations of US$1.0b during the same period of time, resulting in an operating cash to total debt ratio of 39%, indicating that WPX’s debt is appropriately covered by operating cash.
Does WPX’s liquid assets cover its short-term commitments?
Looking at WPX’s US$1.0b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$703m, with a current ratio of 0.7x. The current ratio is calculated by dividing current assets by current liabilities.
Is WPX’s debt level acceptable?
WPX is a relatively highly levered company with a debt-to-equity of 60%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether WPX 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 WPX’s, case, the ratio of 2.54x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although WPX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for WPX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research WPX Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WPX’s future growth? Take a look at our free research report of analyst consensus for WPX’s outlook.
- Valuation: What is WPX 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 WPX 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.