Is Touchstone Exploration (TSE:TXP) using too much debt?

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Touchstone Exploration Inc. (TSE:TXP) uses debt. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Touchstone Exploration

What is Touchstone Exploration’s net debt?

The image below, which you can click on for more details, shows that in March 2022, Touchstone Exploration had $29.9 million in debt, up from $7.19 million in one year. On the other hand, he has $10.1 million in cash, resulting in a net debt of around $19.8 million.

TSX:TXP Debt to Equity June 14, 2022

A Look at Touchstone Exploration Passives

Zooming in on the latest balance sheet data, we can see that Touchstone Exploration had liabilities of US$18.1 million due within 12 months and liabilities of US$54.4 million due beyond. On the other hand, it had liquidities of 10.1 million dollars and 9.52 million dollars of receivables at less than one year. Thus, its liabilities total $52.8 million more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not too bad since Touchstone Exploration has a market capitalization of US$216.2 million, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

While we’re not concerned about Touchstone Exploration’s net debt to EBITDA ratio of 2.7, we believe its extremely low interest coverage of 2.5 times is a sign of high leverage. This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. A redeeming factor for Touchstone Exploration is that it turned last year’s EBIT loss into a US$3.4 million gain, over the past twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Touchstone Exploration’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of earnings before interest and tax (EBIT) is supported by free cash flow. Over the past year, Touchstone Exploration has experienced substantial negative free cash flow, overall. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Reflecting on Touchstone Exploration’s attempt to convert EBIT to free cash flow, we’re certainly not enthusiastic. That said, his ability to manage his total liabilities isn’t all that worrying. Once we consider all of the above factors together, it seems to us that Touchstone Exploration’s debt makes it a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted some with Touchstone Exploration (including 1 that is potentially serious).

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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