Is Dempsey Minerals Limited (ASX:DMI) As Financially Strong As Its Balance Sheet Indicates?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Dempsey Minerals Limited (ASX:DMI), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess DMI’s financial health. View our latest analysis for Dempsey Minerals
Does DMI’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. 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. DMI’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.
Can DMI meet its short-term obligations with the cash in hand?
Since Dempsey 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 A$0.0M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.55x. Generally, for metals and mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Next Steps:
Are you a shareholder? DMI 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 DMI’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I recommend researching market expectations for DMI’s future growth.
Are you a potential investor? DMI’s high growth makes financial flexibility an attractive option. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to also examine the company’s track record. As a following step, you should take a look at DMI’s past performance to figure out DMI’s financial health position.
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.
