Yahoo Finance Alvopetro Energy Ltd (CVE:ALV): Time For A Financial Health Check
Alvopetro Energy Ltd (CVE:ALV), 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 ALV will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ALV has outstanding financial strength. I recommend you look at the following hurdles to assess ALV’s financial health.
See our latest analysis for Alvopetro Energy
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. ALV’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. Opposite to the high growth we were expecting, ALV’s negative revenue growth of -6.6% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ALV pay its short-term liabilities?
Since Alvopetro Energy 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. At the current liabilities level of US$990.0k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$6.4m, with a current ratio of 6.51x. However, many consider anything above 3x to be quite high and could mean that ALV has too much idle capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for ALV to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, ALV’s financial situation may change. This is only a rough assessment of financial health, and I’m sure ALV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Alvopetro Energy to get a better picture of the stock by looking at:
Historical Performance: What has ALV’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.
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.