Zero-debt allows substantial financial flexibility, especially for small-cap companies like Saint Jean Carbon Inc (CVE:SJL), 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. 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. Check out our latest analysis for Saint Jean Carbon
Does SJL’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. SJL’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s 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 pay its short-term liabilities?
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$390.68k liabilities, it seems that the business has been able to meet these commitments with a current assets level of CA$636.22k, leading to a 1.63x current account ratio. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
SJL 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. Moving forward, SJL’s financial situation may change. I admit this is a fairly basic analysis for SJL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Saint Jean Carbon to get a more holistic view 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.