Has Havilah Resources Limited (ASX:HAV) Got Enough Cash To Cover Its Short-Term Obligations?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Havilah Resources Limited (ASX:HAV), 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 HAV has outstanding financial strength. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for Havilah Resources
Is HAV right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either HAV 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. HAV delivered a strikingly high triple-digit revenue growth over the past year, 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 HAV meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, HAV may need to liquidate its short-term assets to pay these immediate obligations. We test for HAV’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that HAV is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for HAV to have some financial flexibility, hence zero-debt. Though, the company’s low liquidity reduces our confidence around meeting short-term obligations. Some level of low-cost debt funding could help address these needs. ] %} Going forward, HAV’s financial situation may change. You should always be keeping abreast of market expectations for HAV’s future growth.
Are you a potential investor? HAV’s high growth makes financial flexibility an attractive option. Although, should adverse events arise, its low liquidity raises concerns over whether short term obligations can be met in time. I encourage you to continue your research by taking a look at HAV’s past performance to figure out HAV’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.
