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Abitibi Royalties Inc. (CVE:RZZ), 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 RZZ will have to follow strict debt obligations which will reduce its financial flexibility. While RZZ has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is RZZ growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. Either RZZ does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. RZZ’s revenue growth over the past year was an impressively high triple-digit rate, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does RZZ’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Abitibi Royalties 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$1.3m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.81x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
As a high-growth company, it may be beneficial for RZZ to have some financial flexibility, hence zero-debt. Since there is also no concerns around RZZ’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I admit this is a fairly basic analysis for RZZ’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Abitibi Royalties to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RZZ’s future growth? Take a look at our free research report of analyst consensus for RZZ’s outlook.
- Historical Performance: What has RZZ’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 firstname.lastname@example.org. 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.