At times companies can claim a lot of things to make themselves look good. However, a due diligence of the financials can provide a clearer picture of how the company is placed.

In a previous article, I mentioned that Hyperdynamics' (NYSE: HDY) existing petroleum prospects are the stuff made more of great expectations rather than grounded reality. Short-term investors have probably made a lot of money trading off this highly volatile stock. But that does not guarantee a long-term gain, and investors should always do due diligence on any investing idea.

The finances
Operating losses of $10.9 million at the end of 2010 do not bode well, especially since they are an increase from $7.3 million from a year ago. Net losses of close to $8 million were marginally lower, thanks to a $3 million sale of assets. Fools should take note of this. It's possible that the company was getting a good price or possible that these weren't exactly productive assets. The sale of assets to cover losses is a bit of an accounting trick and, in general, is usually a bad sign. You don't make money in the future selling off useful assets today.

The company's cash balance of $35 million looks good. The net cash flow, however, was boosted by issuance of common stock worth $51 million -- which is obviously not good, especially if you're a current investor in the company. The balance sheet looks beefed up because of this cash. Unless production in Guinea begins, this may not look good forever though. GMX Resources (NYSE: GMXR) initiated a similar strategy a couple of years back, and is just now seeing the results.

So the operative question is: Will Hyperdynamics make it that long?

A Foolish take-away
It bodes well that Hyperdynamics has above average liquidity with a current ratio of 9.6 times and near-zero debt. Still, a free cash flow of -$41.7 million shows that time is running out. While a number of E&Ps like Kodiak (AMEX: KOG) have managed to make it to production, hopefully Hyperdynamics can follow.

At the moment, I would advise Foolish investors to play it safe. If the company starts production from its West African base, the stock would be promising.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service. For further Foolish analysis and news on Hyperdynamics, add it to My Watchlist.

Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.