Dorchester Minerals LP (NASDAQ:DMLP), 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 DMLP will have to follow strict debt obligations which will reduce its financial flexibility. While DMLP 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 DMLP’s financial health. Check out our latest analysis for Dorchester Minerals
Does DMLP’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. 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. Either DMLP 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. DMLP’s revenue growth in the teens of 18.57% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If DMLP is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does DMLP’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Dorchester Minerals 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. With current liabilities at $0.3M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $14.8M, with a current ratio of 53.71x. However, a ratio greater than 3x may be considered as too high, as DMLP could be holding too much capital in a low-return investment environment.
Are you a shareholder? Having no debt on the books means DMLP has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. I recommend researching market expectations for DMLP’s future growth.
Are you a potential investor? DMLP’s high growth makes financial flexibility an attractive option. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also analyse the company’s track record. As a following step, you should take a look at DMLP’s past performance to conclude on DMLP’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.