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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as OZ Minerals Limited (ASX:OZL), with a market cap of AU$3.0b, often get neglected by retail investors. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at OZL’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into OZL here.
Is OZL’s debt level acceptable?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For OZ Minerals, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with OZL, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can OZL meet its short-term obligations with the cash in hand?
Since OZ 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at OZL’s AU$178m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$904m, with a current ratio of 5.08x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
OZL has zero-debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and shareholders, though, some degree of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure OZL has company-specific issues impacting its capital structure decisions. I recommend you continue to research OZ Minerals to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OZL’s future growth? Take a look at our free research report of analyst consensus for OZL’s outlook.
- Valuation: What is OZL 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 OZL 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.