Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as WPX Energy, Inc. (NYSE:WPX), with a market capitalization of US$5.3b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at WPX’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into WPX here.
Does WPX produce enough cash relative to debt?
Over the past year, WPX has maintained its debt levels at around US$2.5b – this includes long-term debt. At this constant level of debt, WPX’s cash and short-term investments stands at US$3.0m , ready to deploy into the business. Moreover, WPX has produced US$883m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 36%, indicating that WPX’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 WPX’s case, it is able to generate 0.36x cash from its debt capital.
Can WPX meet its short-term obligations with the cash in hand?
Looking at WPX’s US$715m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$739m, with a current ratio of 1.03x. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is WPX’s debt level acceptable?
With a debt-to-equity ratio of 58%, WPX can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In WPX’s case, the ratio of 3.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WPX ample headroom to grow its debt facilities.
WPX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around WPX’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WPX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research WPX Energy to get a more holistic view of the mid-cap 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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