Yahoo Finance Is Leucrotta Exploration Inc (CVE:LXE) A Financially Sound Company?
Leucrotta Exploration Inc (CVE:LXE), 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 LXE 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 recommend you look at the following hurdles to assess LXE’s financial health.
Check out our latest analysis for Leucrotta Exploration
Is LXE right in choosing 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. The lack of debt on LXE’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 LXE is a high-growth company. LXE’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.
Can LXE meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Leucrotta Exploration has no solvency issues, which is 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 CA$4m, the company has been able to meet these commitments with a current assets level of CA$18m, leading to a 5.09x current account ratio. However, many consider anything above 3x to be quite high and could mean that LXE has too much idle capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for LXE to have some financial flexibility, hence zero-debt. Since there is also no concerns around LXE’s liquidity needs, this may be its optimal capital structure for the time being. In the future, LXE’s financial situation may change. I admit this is a fairly basic analysis for LXE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Leucrotta Exploration to get a more holistic view of the stock by looking at:
Historical Performance: What has LXE’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.
