Awilco Drilling PLC (OB:AWDR), 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 AWDR will have to follow strict debt obligations which will reduce its financial flexibility. While AWDR 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 AWDR’s financial health.
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Is AWDR growing fast enough to value 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. The lack of debt on AWDR’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 AWDR is a high-growth company. AWDR delivered a negative revenue growth of -26%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can AWDR pay its short-term liabilities?
Since Awilco Drilling 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. With current liabilities at US$11m, it appears that the company has been able to meet these commitments with a current assets level of US$82m, leading to a 7.6x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors.
Having no debt on the books means AWDR has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around AWDR’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure AWDR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Awilco Drilling to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AWDR’s future growth? Take a look at our free research report of analyst consensus for AWDR’s outlook.
- Historical Performance: What has AWDR’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.