GIR Natureview Resorts Limited (NSEI:GIRRESORTS), 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 GIRRESORTS will have to follow strict debt obligations which will reduce its financial flexibility. While GIRRESORTS has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess GIRRESORTS’s financial health. See our latest analysis for GIRRESORTS
Does GIRRESORTS’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either GIRRESORTS 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. GIRRESORTS’s revenue growth in the teens of 11.13% is not considered as high-growth, especially for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does GIRRESORTS’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, GIR Natureview Resorts 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. Looking at GIRRESORTS’s most recent ₹7.0M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. Usually, for commercial services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Are you a shareholder? Since GIRRESORTS is a low-growth stock in terms of its revenues, not taking advantage of lower cost debt may not be the best strategy. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. I suggest you take a look into a future growth analysis to examine the company’s position.
Are you a potential investor? GIRRESORTS’s financial health in terms of its liquidity shouldn’t be a concern for potential investors. Though, its low sales growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. Keep in mind I haven’t considered other factors such as how GIRRESORTS has been performing in the past. I encourage you to continue your research by taking a look at GIRRESORTS’s past performance in order to determine for yourself whether its zero-debt position is justified.