Renascor Resources Limited (ASX:RNU), 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 RNU 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 RNU has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for Renascor Resources
Does RNU’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. RNU’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. Opposite to the high growth we were expecting, RNU’s negative revenue growth of -31.79% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can RNU pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Renascor Resources 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. Looking at RNU’s most recent AU$740.21k liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$3.02m, leading to a 4.08x current account ratio. However, a ratio greater than 3x may be considered as too high, as RNU could be holding too much capital in a low-return investment environment.
Next Steps:
As a high-growth company, it may be beneficial for RNU to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, RNU’s financial situation may change. I admit this is a fairly basic analysis for RNU’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Renascor Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RNU’s future growth? Take a look at our free research report of analyst consensus for RNU’s outlook.
- Historical Performance: What has RNU’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.