The direct benefit for Sandstorm Gold Ltd (TSE:SSL), 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 SSL will have to adhere to stricter debt covenants and have less 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 take you through a few basic checks to assess the financial health of companies with no debt.
Is SSL growing fast enough to value 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 SSL’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 SSL is a high-growth company. A single-digit revenue growth of 5.3% for SSL is considerably low for a small-cap company. More capital can help the business grow faster. If SSL is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SSL meet its short-term obligations with the cash in hand?
Since Sandstorm Gold 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. 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. Looking at SSL’s most recent US$7.4m liabilities, the company has been able to meet these commitments with a current assets level of US$18.2m, leading to a 2.46x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
SSL 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 SSL has been performing in the past. You should continue to research Sandstorm Gold to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SSL’s future growth? Take a look at our free research report of analyst consensus for SSL’s outlook.
- Valuation: What is SSL 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 SSL 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.