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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Denison Mines Corp. (TSE:DML), 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 DML has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is DML right in choosing 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 DML’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 DML is a high-growth company. DML delivered a negative revenue growth of -9.6%. 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 DML meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Denison Mines 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. At the current liabilities level of CA$7.6m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.96x. Having said that, a ratio greater than 3x may be considered high by some.
DML 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. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how DML has been performing in the past. I recommend you continue to research Denison Mines to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DML’s future growth? Take a look at our free research report of analyst consensus for DML’s outlook.
- Historical Performance: What has DML’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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.