The direct benefit for Endeavour Silver Corp (TSE:EDR), 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 EDR will have to adhere to stricter debt covenants and have less financial flexibility. While EDR has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 EDR’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. EDR’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. EDR’s revenue growth in the teens of 14.8% is not considered as high-growth, especially for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does EDR’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Endeavour Silver 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 EDR’s most recent US$21.9m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$80.8m, leading to a 3.68x current account ratio. However, a ratio greater than 3x may be considered as too high, as EDR could be holding too much capital in a low-return investment environment.
Having no debt on the books means EDR has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around EDR’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure EDR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Endeavour Silver to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EDR’s future growth? Take a look at our free research report of analyst consensus for EDR’s outlook.
- Valuation: What is EDR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EDR is currently mispriced by the market.
- 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.
To help readers see past 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.
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