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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Nova Minerals Limited (ASX:NVA), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? 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 Nova Minerals
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 NVA’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 NVA is a high-growth company. NVA delivered a strikingly high triple-digit revenue growth over the past year, 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.
Does NVA’s liquid assets cover its short-term commitments?
Since Nova Minerals 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at NVA’s AU$316k in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.24x. Having said that, many consider a ratio above 3x to be high.
Next Steps:
NVA is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, NVA’s financial situation may change. Keep in mind I haven’t considered other factors such as how NVA has been performing in the past. You should continue to research Nova Minerals to get a more holistic view of the stock by looking at: