Alt Resources Limited (ASX:ARS), 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 ARS will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ARS has outstanding financial strength. I recommend you look at the following hurdles to assess ARS’s financial health. See our latest analysis for ARS
Does ARS’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 ARS’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 ARS is a high-growth company. ARS delivered a strikingly high triple-digit revenue growth over the past year, 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 ARS pay its short-term liabilities?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, ARS may need to liquidate its short-term assets to pay these immediate obligations. We test for ARS’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that ARS is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for ARS to have some financial flexibility, hence zero-debt. Since there is also no concerns around ARS’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I suggest keeping on top of market expectations for ARS’s future growth.
Are you a potential investor? ARS’s high growth makes financial flexibility an attractive option. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to further examine ARS’s track record. As a following step, you should take a look at ARS’s past performance to conclude on ARS’s financial health.
To help readers see pass 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.