David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, TXO Partners, L.P. (NYSE:TXO) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is TXO Partners's Net Debt?
The image below, which you can click on for greater detail, shows that TXO Partners had debt of US$7.10m at the end of June 2024, a reduction from US$21.1m over a year. But on the other hand it also has US$76.0m in cash, leading to a US$68.9m net cash position.
A Look At TXO Partners' Liabilities
The latest balance sheet data shows that TXO Partners had liabilities of US$35.8m due within a year, and liabilities of US$165.9m falling due after that. On the other hand, it had cash of US$76.0m and US$28.5m worth of receivables due within a year. So it has liabilities totalling US$97.2m more than its cash and near-term receivables, combined.
Since publicly traded TXO Partners shares are worth a total of US$758.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TXO Partners boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TXO Partners's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year TXO Partners had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$287m. That makes us nervous, to say the least.
So How Risky Is TXO Partners?
While TXO Partners lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$34m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for TXO Partners (of which 1 is potentially serious!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
