Is Bougainville Copper Limited (ASX:BOC) As Financially Strong As Its Balance Sheet Indicates?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Bougainville Copper Limited (ASX:BOC), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BOC has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Bougainville Copper
Is BOC 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. 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 BOC’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 BOC is a high-growth company. BOC’s revenue growth over the past year is a single-digit 4.14% which is relatively low for a small-cap company. More capital can help the business grow faster. If BOC is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can BOC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Bougainville Copper has no solvency issues, which is 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. At the current liabilities level of PGK15.5M liabilities, it appears that the company has been able to meet these commitments with a current assets level of PGK19.6M, leading to a 1.26x current account ratio. Usually, for metals and mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
Are you a shareholder? Having no debt on the books means BOC has more financial freedom to keep growing at its current fast rate. However, the company’s low liquidity lowers our confidence around meeting near-term commitments. Some level of low-cost debt funding could help address these needs. ] %} Going forward, its financial position may change. I suggest keeping on top of market expectations for BOC’s future growth.
Are you a potential investor? BOC’s high growth makes financial flexibility an attractive option. Although, in the event of adversity, the company may struggle to meet its short-term obligations due to its low liquidity in assets. I encourage you to continue your research by taking a look at BOC’s past performance in order to determine for yourself whether its zero-debt position is justified.
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.
