Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like WPX Energy Inc (NYSE:WPX), with a market cap of US$6.2b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine WPX’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WPX here.
Does WPX produce enough cash relative to debt?
Over the past year, WPX has reduced its debt from US$2.9b to US$2.2b , which includes long-term debt. With this reduction in debt, WPX’s cash and short-term investments stands at US$36m , ready to deploy into the business. Additionally, WPX has produced US$931m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 42%, indicating that WPX’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In WPX’s case, it is able to generate 0.42x cash from its debt capital.
Does WPX’s liquid assets cover its short-term commitments?
With current liabilities at US$1.1b, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$578m, with a current ratio of 0.51x.
Can WPX service its debt comfortably?
WPX is a relatively highly levered company with a debt-to-equity of 57%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since WPX is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure WPX has company-specific issues impacting its capital structure decisions. I suggest you continue to research WPX Energy to get a more holistic view 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.
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.