Yahoo Finance Is KFG Resources Ltd’s (CVE:KFG) Balance Sheet A Threat To Its Future?
KFG Resources Ltd (CVE:KFG), 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 KFG will have to follow strict debt obligations which will reduce its financial flexibility. 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 take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for KFG Resources
Is KFG 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. 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. KFG’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. KFG’s revenue growth over the past year is a single-digit 5.0% which is relatively low for a small-cap company. More capital can help the business grow faster. If KFG is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does KFG’s liquid assets cover its short-term commitments?
Since KFG Resources 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. With current liabilities at US$576.5k, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.98x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
As a high-growth company, it may be beneficial for KFG to have some financial flexibility, hence zero-debt. Since there is also no concerns around KFG’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, KFG’s financial situation may change. Keep in mind I haven’t considered other factors such as how KFG has been performing in the past. I recommend you continue to research KFG Resources to get a more holistic view of the stock by looking at:
Valuation: What is KFG 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 KFG is currently mispriced by the market.
Historical Performance: What has KFG’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.
