Yahoo Finance Are Monument Mining Limited’s (CVE:MMY) Interest Costs Too High?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Monument Mining Limited (CVE:MMY), 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 MMY has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess MMY’s financial health.
View our latest analysis for Monument Mining
Is MMY 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. 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. MMY’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. MMY’s revenue growth over the past year is a double-digit 22% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can MMY pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Monument Mining 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. At the current liabilities level of US$6.8m, it seems that the business has been able to meet these commitments with a current assets level of US$34m, leading to a 4.97x current account ratio. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
As a high-growth company, it may be beneficial for MMY to have some financial flexibility, hence zero-debt. Since there is also no concerns around MMY’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, MMY’s financial situation may change. This is only a rough assessment of financial health, and I’m sure MMY has company-specific issues impacting its capital structure decisions. I recommend you continue to research Monument Mining to get a more holistic view of the stock by looking at:
Historical Performance: What has MMY’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.
