Saint Jean Carbon Inc. (CVE:SJL), 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 SJL will have to follow strict debt obligations which will reduce its 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 recommend you look at the following hurdles to assess SJL’s financial health.
Does SJL’s growth rate justify its decision for 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 SJL’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 SJL is a high-growth company. SJL delivered a strikingly high triple-digit revenue growth over the past year, 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.
Can SJL meet its short-term obligations with the cash in hand?
Since Saint Jean Carbon 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. At the current liabilities level of CA$386k, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$288k, leading to a current ratio of 0.75x.
As a high-growth company, it may be beneficial for SJL to have some financial flexibility, hence zero-debt. However, the company’s low liquidity reduces our conviction around meeting short-term obligations. Some level of low-cost debt funding could help address these needs. Going forward, its financial position may be different. I admit this is a fairly basic analysis for SJL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Saint Jean Carbon to get a better picture of the stock by looking at:
- Historical Performance: What has SJL’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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