Core Exploration Limited (ASX:CXO), 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 CXO 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. View out our latest analysis for Core Exploration
Is CXO growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. The lack of debt on CXO’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 CXO is a high-growth company.
Does CXO’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Core Exploration has no solvency issues, which is 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. At the current liabilities level of AU$748.74k liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$5.12m, with a current ratio of 6.84x. Though, anything above 3x is considered high and could mean that CXO has too much idle capital in low-earning investments.
CXO is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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, its financial position may change. Keep in mind I haven’t considered other factors such as how CXO has been performing in the past. I suggest you continue to research Core Exploration to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CXO’s future growth? Take a look at our free research report of analyst consensus for CXO’s outlook.
- Historical Performance: What has CXO’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.