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Angus Energy plc (LON:ANGS), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is ANGS will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ANGS has outstanding financial strength. I recommend you look at the following hurdles to assess ANGS’s financial health.
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Is ANGS right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. ANGS’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. ANGS’s revenue growth over the past year was an impressively high triple-digit rate, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can ANGS pay its short-term liabilities?
Since Angus Energy doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at ANGS’s most recent UK£481k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£2m, with a current ratio of 4.26x. Having said that, a ratio greater than 3x may be considered as quite high.
Next Steps:
Having no debt on the books means ANGS has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ANGS’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, ANGS’s financial situation may change. This is only a rough assessment of financial health, and I’m sure ANGS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Angus Energy to get a more holistic view of the stock by looking at: