Barnwell Industries, Inc. (NYSEMKT:BRN), 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 BRN will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BRN has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Does BRN’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. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. BRN’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. BRN delivered a negative revenue growth of -4.6%. 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 BRN meet its short-term obligations with the cash in hand?
Since Barnwell Industries 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 BRN’s US$4.2m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$11m, leading to a 2.57x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
BRN is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around BRN’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, BRN’s financial situation may change. I admit this is a fairly basic analysis for BRN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Barnwell Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BRN’s future growth? Take a look at our free research report of analyst consensus for BRN’s outlook.
- Historical Performance: What has BRN’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.
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