Zero-debt allows substantial financial flexibility, especially for small-cap companies like Symbol Mining Limited (ASX:SL1), 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 SL1 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Does SL1’s growth rate justify its decision for financial flexibility over 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. Either SL1 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. SL1’s revenue growth over the past year was an impressively high triple-digit rate, 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 SL1’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Symbol Mining 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. Looking at SL1’s most recent AU$2m liabilities, the company may not be able to easily meet these obligations given the level of current assets of AU$767k, with a current ratio of 0.49x.
Next Steps:
Having no debt on the books means SL1 has more financial freedom to keep growing at its current fast rate. However, its lack of liquidity lowers our conviction around meeting near-term commitments. Some level of low-cost debt funding could help meet these needs. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure SL1 has company-specific issues impacting its capital structure decisions. You should continue to research Symbol Mining to get a more holistic view of the stock by looking at:
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Valuation: What is SL1 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SL1 is currently mispriced by the market.
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Historical Performance: What has SL1’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.
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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.