Sabine Royalty Trust (NYSE:SBR), 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 SBR will have to follow strict debt obligations which will reduce its financial flexibility. While SBR has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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. View our latest analysis for Sabine Royalty Trust
Is financial flexibility worth the 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. The lack of debt on SBR’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 SBR is a high-growth company. SBR delivered a negative revenue growth of -37.94%. 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.
Does SBR’s liquid assets cover its short-term commitments?
Since Sabine Royalty Trust 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. Looking at SBR’s most recent $0.2M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $5.0M, with a current ratio of 20.08x. However, anything about 3x may be excessive, since SBR may be leaving too much capital in low-earning investments.
Are you a shareholder? SBR’s soft top-line growth means not having any low-cost debt funding may not be optimal for the business. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to examine what the market expects for the company moving forward.
Are you a potential investor? SBR’s health in terms of financial liquidity should ease potential investors’ concerns. But, its low sales growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure SBR has company-specific issues impacting its capital structure decisions. I encourage you to continue your research by taking a look at SBR’s past performance to figure out SBR’s financial health position.