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Jericho Oil Corporation (CVE:JCO), 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 JCO will have to follow strict debt obligations which will reduce its financial flexibility. While JCO 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.
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either JCO 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. A single-digit revenue growth of 2.9% for JCO is considerably low for a small-cap company. More capital can help the business grow faster. If JCO is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can JCO pay its short-term liabilities?
Since Jericho Oil 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. Looking at JCO’s CA$311k in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of CA$4.4m, leading to a 14.25x current account ratio. However, a ratio greater than 3x may be considered high by some.
As a high-growth company, it may be beneficial for JCO to have some financial flexibility, hence zero-debt. Since there is also no concerns around JCO’s liquidity needs, this may be its optimal capital structure for the time being. In the future, JCO’s financial situation may change. I admit this is a fairly basic analysis for JCO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Jericho Oil to get a more holistic view of the stock by looking at:
- Historical Performance: What has JCO’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.