Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Carbine Resources Limited (ASX:CRB), 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 CRB 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 CRB has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Does CRB’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. CRB’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. CRB delivered a negative revenue growth of -20%. 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 CRB’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Carbine Resources has no solvency issues, which is 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. Looking at CRB’s AU$32k in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 105x. Having said that, many consider a ratio above 3x to be high.
As a high-growth company, it may be beneficial for CRB to have some financial flexibility, hence zero-debt. Since there is also no concerns around CRB’s liquidity needs, this may be its optimal capital structure for the time being. In the future, CRB’s financial situation may change. Keep in mind I haven’t considered other factors such as how CRB has been performing in the past. You should continue to research Carbine Resources to get a better picture of the stock by looking at:
- Historical Performance: What has CRB’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.