Zero-debt allows substantial financial flexibility, especially for small-cap companies like RMA Global Limited (ASX:RMY), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean RMY has outstanding financial strength. I recommend you look at the following hurdles to assess RMY’s financial health.
Does RMY’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. The lack of debt on RMY’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 RMY is a high-growth company. RMY delivered a strikingly high triple-digit revenue growth over the past year, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does RMY’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, RMA Global 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$2.0m, the company has been able to meet these obligations given the level of current assets of AU$12m, with a current ratio of 5.87x. However, a ratio greater than 3x may be considered as quite high.
Having no debt on the books means RMY has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around RMY’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I admit this is a fairly basic analysis for RMY’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research RMA Global to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RMY’s future growth? Take a look at our free research report of analyst consensus for RMY’s outlook.
- Valuation: What is RMY worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RMY is currently mispriced by the market.
- 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 firstname.lastname@example.org.