What You Must Know About Greenpower Energy Limited's (ASX:GPP) Financial Strength

Greenpower Energy Limited (ASX:GPP), 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 GPP 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 GPP has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

See our latest analysis for Greenpower Energy

Does GPP'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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. GPP’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. GPP delivered a negative revenue growth of -166%. 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 GPP pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Greenpower Energy 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. With current liabilities at AU$127.4k, it appears that the company has been able to meet these commitments with a current assets level of AU$1.9m, leading to a 15.03x current account ratio. However, a ratio greater than 3x may be considered as too high, as GPP could be holding too much capital in a low-return investment environment.

Next Steps:

Having no debt on the books means GPP 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, GPP's financial situation may change. This is only a rough assessment of financial health, and I'm sure GPP has company-specific issues impacting its capital structure decisions. You should continue to research Greenpower Energy to get a better picture of the stock by looking at:

1. Historical Performance: What has GPP'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.
2. 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.