Abcourt Mines Inc. (CVE:ABI), 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 ABI will have to follow strict debt obligations which will reduce its financial flexibility. While ABI has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is ABI right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. Either ABI 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. ABI’s revenue growth over the past year is a double-digit 25% which is considerably high for a small-cap company. 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 ABI meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Abcourt Mines 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 CA$5.8m, it appears that the company has been able to meet these obligations given the level of current assets of CA$8.5m, with a current ratio of 1.47x. Usually, for Metals and Mining companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Having no debt on the books means ABI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ABI’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure ABI has company-specific issues impacting its capital structure decisions. You should continue to research Abcourt Mines to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ABI’s future growth? Take a look at our free research report of analyst consensus for ABI’s outlook.
- Valuation: What is ABI 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 ABI 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.
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