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While small-cap stocks, such as WPX Energy, Inc. (NYSE:WPX) with its market cap of US$4.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into WPX here.
WPX’s Debt (And Cash Flows)
WPX's debt level has been constant at around US$2.6b over the previous year which accounts for long term debt. At this stable 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 generated US$1.0b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, indicating that WPX’s operating cash is sufficient to cover its debt.
Can WPX meet its short-term obligations with the cash in hand?
With current liabilities at US$1.0b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.7x. The current ratio is calculated by dividing current assets by current liabilities.
Can WPX service its debt comfortably?
With a debt-to-equity ratio of 58%, WPX can be considered as an above-average leveraged company. 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.
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. But, its lack of liquidity raises questions over current asset management practices 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. I recommend you 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.