Does Zero-Debt Make Catalyst Metals Limited (ASX:CYL) A Financially Strong Company?
The direct benefit for Catalyst Metals Limited (ASX:CYL), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is CYL will have to adhere to stricter debt covenants and have less financial flexibility. 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for CYL
Is CYL right in choosing 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. Either CYL 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. CYL’s revenue growth over the past year was an impressively high triple-digit rate, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can CYL pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Catalyst Metals 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 A$0.4M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.78x. However, a ratio greater than 3x may be considered as too high, as CYL could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? Having no debt on the books means CYL has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around CYL’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I suggest keeping abreast of market expectations for CYL’s future growth.
Are you a potential investor? Catalyst Metals is a fast-growing company, making financial flexibility a valuable option for the company. In addition, 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 also examine CYL’s track record. You should continue your analysis by taking a look at CYL’s past performance to figure out CYL’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.
