The direct benefit for Anglo African Oil & Gas plc (LON:AAOG), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is AAOG will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean AAOG 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.
Does AAOG’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. AAOG’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. AAOG’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 AAOG’s liquid assets cover its short-term commitments?
Since Anglo African Oil & Gas 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 AAOG’s UK£2.0m in current liabilities, the company has been able to meet these commitments with a current assets level of UK£8.1m, leading to a 4.07x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors.
As a high-growth company, it may be beneficial for AAOG 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. Going forward, AAOG’s financial situation may change. This is only a rough assessment of financial health, and I’m sure AAOG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Anglo African Oil & Gas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AAOG’s future growth? Take a look at our free research report of analyst consensus for AAOG’s outlook.
- Valuation: What is AAOG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AAOG is currently mispriced by the market.
- 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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