Are Great Panther Silver Limited’s (TSE:GPR) Interest Costs Too High?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Great Panther Silver Limited (TSE:GPR), 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. 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 Great Panther Silver
Is financial flexibility worth the 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. Either GPR 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. GPR’s revenue growth over the past year is a double-digit 24% 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 GPR pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Great Panther 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. With current liabilities at US$14m, the company has been able to meet these commitments with a current assets level of US$82m, leading to a 6.03x current account ratio. However, a ratio greater than 3x may be considered as quite high.
Next Steps:
As a high-growth company, it may be beneficial for GPR 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. Moving forward, its financial position may change. Keep in mind I haven’t considered other factors such as how GPR has been performing in the past. I suggest you continue to research Great Panther Silver to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GPR’s future growth? Take a look at our free research report of analyst consensus for GPR’s outlook.
Historical Performance: What has GPR’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 editorial-team@simplywallst.com.
