Yahoo Finance Are Lucara Diamond Corp’s (TSE:LUC) Interest Costs Too High?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Lucara Diamond Corp (TSE:LUC), 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 LUC 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 Lucara Diamond
Is LUC growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. LUC’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. LUC delivered a negative revenue growth of -2.3%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can LUC meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Lucara Diamond 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. At the current liabilities level of US$22m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.28x. Having said that, anything above 3x may be considered excessive by some investors. They might argue LUC is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means LUC has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, LUC’s financial situation may change. Keep in mind I haven’t considered other factors such as how LUC has been performing in the past. I recommend you continue to research Lucara Diamond to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LUC’s future growth? Take a look at our free research report of analyst consensus for LUC’s outlook.
Valuation: What is LUC 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 LUC is currently mispriced by the market.
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.
