Zero-debt allows substantial financial flexibility, especially for small-cap companies like AXMIN Inc. (CVE:AXM), 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 AXM has outstanding financial strength. 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.
Is AXM 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on AXM’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 AXM is a high-growth company. AXM’s revenue growth over the past year is an impressively high double-digit 67%. 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 AXM’s liquid assets cover its short-term commitments?
Since AXMIN 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. Looking at AXM’s US$1.6m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$2.4m, with a current ratio of 1.48x. Generally, for Metals and Mining companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
As a high-growth company, it may be beneficial for AXM to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, AXM’s financial situation may change. I admit this is a fairly basic analysis for AXM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AXMIN to get a more holistic view of the stock by looking at:
- Historical Performance: What has AXM’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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