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Parex Resources Inc (TSE:PXT): Time For A Financial Health Check

Parex Resources Inc (TSE:PXT), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is PXT will have to follow strict debt obligations which will reduce its financial flexibility. While PXT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

Check out our latest analysis for Parex Resources

Is PXT growing fast enough to value financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either PXT does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. PXT delivered a strikingly high revenue growth of 79% over the past year. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

TSX:PXT Historical Debt December 5th 18
TSX:PXT Historical Debt December 5th 18

Does PXT’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Parex Resources has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$395m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

Next Steps:

PXT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around PXT’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure PXT has company-specific issues impacting its capital structure decisions. You should continue to research Parex Resources to get a more holistic view of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for PXT’s future growth? Take a look at our free research report of analyst consensus for PXT’s outlook.

  2. Valuation: What is PXT 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 PXT is currently mispriced by the market.

  3. 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.