Is Alicanto Minerals Limited’s (ASX:AQI) Balance Sheet Strong Enough To Weather A Storm?
Alicanto Minerals Limited (ASX:AQI), 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 AQI will have to follow strict debt obligations which will reduce its financial flexibility. While AQI 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 AQI’s financial health. See our latest analysis for AQI
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. AQI’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. AQI delivered a strikingly high revenue growth of 93.44% over the past year. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does AQI’s liquid assets cover its short-term commitments?
Since Alicanto 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. 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. At the current liabilities level of A$0.6M liabilities, it seems that the business has been able to meet these commitments with a current assets level of A$1.9M, leading to a 3.41x current account ratio. Though, anything above 3x is considered high and could mean that AQI has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for AQI to have some financial flexibility, hence zero-debt. Since there is also no concerns around AQI’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. You should always be keeping on top of market expectations for AQI’s future growth.
Are you a potential investor? AQI’s high growth makes financial flexibility an attractive option. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to further examine AQI’s track record. I encourage you to continue your research by taking a look at AQI’s past performance to conclude on AQI’s financial health.
To help readers see pass 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.
