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Zero-debt allows substantial financial flexibility, especially for small-cap companies like China Aviation Oil (Singapore) Corporation Ltd (SGX:G92), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While G92 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 China Aviation Oil (Singapore)
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on G92’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 G92 is a high-growth company. A double-digit revenue growth of 31% is considered relatively high for a small-cap company like G92. 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 G92 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, China Aviation Oil (Singapore) has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$2.0b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
G92 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around G92’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for G92’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Aviation Oil (Singapore) to get a better picture of the stock by looking at: