Is Metallica Minerals Limited’s (ASX:MLM) Liquidity As Good As Its Solvency?
The direct benefit for Metallica Minerals Limited (ASX:MLM), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is MLM will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean MLM has outstanding 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. Check out our latest analysis for Metallica Minerals
Is financial flexibility worth the 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. MLM’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. Opposite to the high growth we were expecting, MLM’s negative revenue growth of -58.47% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can MLM meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Metallica Minerals has no solvency issues, which is 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 MLM’s most recent A$0.3M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of A$3.8M, with a current ratio of 14.65x. However, anything above 3x is considered high and could mean that MLM has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? MLM’s soft top-line growth means having no debt on its balance sheet isn’t necessarily the best thing. As shareholders, you should try and determine whether this strategy is justified for MLM, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to properly assess what the market expects for the company moving forward.
Are you a potential investor? The company’s current holding of liquid assets gives it some level of security in any case of adverse events. But, its low sales growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. This is only a rough assessment of financial health, and I’m sure MLM has company-specific issues impacting its capital structure decisions. You should continue your analysis by taking a look at MLM’s past performance to figure out MLM’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.
