What You Must Know About Hipo Resources Limited’s (ASX:HIP) Financial Strength
Hipo Resources Limited (ASX:HIP), 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 HIP will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean HIP has outstanding financial strength. I recommend you look at the following hurdles to assess HIP’s financial health.
View our latest analysis for Hipo Resources
Is HIP right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either HIP 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.
Can HIP meet its short-term obligations with the cash in hand?
Since Hipo Resources 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. At the current liabilities level of AU$437k liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.31x. However, many consider anything above 3x to be quite high.
Next Steps:
Having no debt on the books means HIP has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, HIP’s financial situation may change. Keep in mind I haven’t considered other factors such as how HIP has been performing in the past. I recommend you continue to research Hipo Resources to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HIP’s future growth? Take a look at our free research report of analyst consensus for HIP’s outlook.
Historical Performance: What has HIP’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 editorial-team@simplywallst.com.
