Does Zero-Debt Make Argonaut Resources NL (ASX:ARE) A Financially Strong Company?

The direct benefit for Argonaut Resources NL (ASX:ARE), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ARE will have to adhere to stricter debt covenants and have less financial flexibility. While ARE has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ARE’s financial health. See our latest analysis for ARE

Does ARE'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. 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. ARE’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.

Can ARE meet its short-term obligations with the cash in hand?

Since Argonaut Resources NL 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. 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 A$0.8M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.21x, which is below the prudent industry ratio of 3x.

Next Steps:

Are you a shareholder? Having no debt on the books means ARE has more financial freedom to keep growing at its current fast rate. Though, its lack of liquidity lowers our conviction around meeting short-term commitments. Some level of low-cost debt funding could help meet these needs. ] %} Going forward, its financial position may be different. I suggest keeping abreast of market expectations for ARE's future growth.

Are you a potential investor? Argonaut Resources NL is a high-growth company with financial flexibility and headroom to fund future growth. However, should adverse events arise, the company may be pressed to meet its short-term obligations due to its low-liquidity asset composition. You should continue your analysis by taking a look at ARE's past performance in order to determine for yourself whether its zero-debt position is justified.

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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.