Zero-debt allows substantial financial flexibility, especially for small-cap companies like Dorchester Minerals LP (NASDAQ:DMLP), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean DMLP has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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. DMLP’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. DMLP’s revenue growth over the past year is a double-digit 47.4% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can DMLP pay its short-term liabilities?
Since Dorchester 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. 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. At the current liabilities level of US$1.6m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$31.2m, leading to a 18.96x current account ratio. Though, anything about 3x may be excessive, since DMLP may be leaving too much capital in low-earning investments.
As a high-growth company, it may be beneficial for DMLP to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. I admit this is a fairly basic analysis for DMLP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Dorchester Minerals to get a more holistic view of the stock by looking at:
- Valuation: What is DMLP 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 DMLP is currently mispriced by the market.
- Historical Performance: What has DMLP’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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.