Yahoo Finance Are Relentless Resources Ltd’s (CVE:RRL) Interest Costs Too High?
Relentless Resources Ltd (CVE:RRL), 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 RRL 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 RRL’s financial health.
See our latest analysis for Relentless Resources
Does RRL’s growth rate justify its decision for 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. Either RRL 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. RRL delivered a negative revenue growth of -12.1%. 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 RRL meet its short-term obligations with the cash in hand?
Since Relentless 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. 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. Looking at RRL’s most recent CA$334.3k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CA$4.3m, with a current ratio of 12.73x. Though, a ratio greater than 3x may be considered as too high, as RRL could be holding too much capital in a low-return investment environment.
Next Steps:
As a high-growth company, it may be beneficial for RRL to have some financial flexibility, hence zero-debt. Since there is also no concerns around RRL’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure RRL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Relentless Resources to get a more holistic view of the stock by looking at:
Historical Performance: What has RRL’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.
