Mesabi Trust (NYSE:MSB), 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 MSB will have to follow strict debt obligations which will reduce its financial flexibility. While MSB has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess MSB’s financial health. Check out our latest analysis for Mesabi Trust
Does MSB’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. The lack of debt on MSB’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if MSB is a high-growth company. A revenue growth in the teens is not considered high-growth. MSB’s revenue growth of 10.44% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can MSB pay its short-term liabilities?
Since Mesabi Trust 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. With current liabilities at $1.9M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.33x. However, a ratio greater than 3x may be considered as too high, as MSB could be holding too much capital in a low-return investment environment.
Are you a shareholder? As a high-growth company, it may be beneficial for MSB to have some financial flexibility, hence zero-debt. Since there is also no concerns around MSB’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I recommend researching market expectations for MSB’s future growth.
Are you a potential investor? Mesabi Trust is a fast-growing company, making financial flexibility a valuable option for the company. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also analyse MSB’s track record. I encourage you to continue your research by taking a look at MSB’s past performance to conclude on MSB’s financial health.
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.