Zero-debt allows substantial financial flexibility, especially for small-cap companies like Golden Minerals Company (AMEX:AUMN), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While AUMN 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 AUMN’s financial health. View our latest analysis for Golden Minerals
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. Either AUMN 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. AUMN delivered a negative revenue growth of -20.70%. 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 AUMN’s liquid assets cover its short-term commitments?
Since Golden Minerals 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. With current liabilities at $1.2M liabilities, the company has been able to meet these commitments with a current assets level of $4.8M, leading to a 3.82x current account ratio. Though, anything above 3x is considered high and could mean that AUMN has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? Given that Golden Minerals is a relatively low-growth company, being in a zero-debt position isn’t always optimal. As shareholders, you should try and determine whether this strategy is justified for AUMN, and whether the company needs financial flexibility at this point in time. I recommend taking a look into a future growth analysis to account for what the market expects for the company moving forward.
Are you a potential investor? AUMN’s health in terms of financial liquidity should ease potential investors’ concerns. However, its low sales growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. I admit this is a fairly basic analysis for AUMN’s financial health. Other important fundamentals need to be considered alongside. For your next step, you should take a look at AUMN’s past performance to conclude on AUMN’s financial health.