Yahoo Finance What does Renaissance Oil Corp’s (CVE:ROE) Balance Sheet Tell Us About Its Future?
The direct benefit for Renaissance Oil Corp (CVE:ROE), 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 ROE will have to adhere to stricter debt covenants and have less financial flexibility. While ROE 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 Renaissance Oil
Is ROE growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. Either ROE 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. A revenue growth in the teens is not considered high-growth. ROE’s revenue growth of 17% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can ROE meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Renaissance Oil 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. With current liabilities at CA$3.9m, it appears that the company has been able to meet these commitments with a current assets level of CA$13m, leading to a 3.32x current account ratio. However, a ratio greater than 3x may be considered high by some.
Next Steps:
Having no debt on the books means ROE has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ROE’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure ROE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Renaissance Oil to get a more holistic view of the stock by looking at:
Historical Performance: What has ROE’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.
