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The direct benefit for Bulletin Resources Limited (ASX:BNR), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is BNR will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BNR has outstanding financial strength. I recommend you look at the following hurdles to assess BNR’s financial health.
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Is BNR 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. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on BNR’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 BNR is a high-growth company. BNR delivered a strikingly high triple-digit revenue growth over the past year, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does BNR’s liquid assets cover its short-term commitments?
Since Bulletin Resources 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. With current liabilities at AU$136k, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 26.44x. Having said that, a ratio greater than 3x may be considered as quite high.
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Having no debt on the books means BNR has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around BNR’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, BNR’s financial situation may change. Keep in mind I haven’t considered other factors such as how BNR has been performing in the past. I suggest you continue to research Bulletin Resources to get a better picture of the stock by looking at: