GobiMin Inc (CVE:GMN), 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 GMN will have to follow strict debt obligations which will reduce its financial flexibility. While GMN has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 GMN right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 GMN’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 GMN is a high-growth company. Opposite to the high growth we were expecting, GMN’s negative revenue growth of -100% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can GMN pay its short-term liabilities?
Given zero long-term debt on its balance sheet, GobiMin 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 US$2.2m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 9.71x. Having said that, a ratio above 3x may be considered excessive by some investors.
Given that GobiMin is a relatively low-growth company, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for GMN, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how GMN has been performing in the past. I recommend you continue to research GobiMin to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GMN’s future growth? Take a look at our free research report of analyst consensus for GMN’s outlook.
- Historical Performance: What has GMN’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.
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.
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