Ausgold Limited (ASX:AUC), 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 AUC will have to follow strict debt obligations which will reduce its financial flexibility. While AUC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.

See our latest analysis for Ausgold

Is AUC growing fast enough to value financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on AUC’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if AUC is a high-growth company. Opposite to the high growth we were expecting, AUC’s negative revenue growth of -21.4% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Does AUC’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Ausgold has no solvency issues, which is 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. At the current liabilities level of AU$475.0k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$3.0m, with a current ratio of 6.31x. Though, anything above 3x is considered high and could mean that AUC has too much idle capital in low-earning investments.

Next Steps:

As a high-growth company, it may be beneficial for AUC to have some financial flexibility, hence zero-debt. Since there is also no concerns around AUC’s liquidity needs, this may be its optimal capital structure for the time being. In the future, AUC’s financial situation may change. I admit this is a fairly basic analysis for AUC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ausgold to get a more holistic view of the stock by looking at:

1. Historical Performance: What has AUC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. 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 editorial-team@simplywallst.com.