What You Must Know About Stellar Resources Limited’s (ASX:SRZ) Financial Health

Stellar Resources Limited (ASX:SRZ), 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 SRZ 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 SRZ has outstanding financial strength. I recommend you look at the following hurdles to assess SRZ’s financial health. See our latest analysis for SRZ

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. 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 SRZ 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. Opposite to the high growth we were expecting, SRZ’s negative revenue growth of -10.74% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can SRZ pay its short-term liabilities?

What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, SRZ may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that SRZ is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Next Steps:

Are you a shareholder? Given that Stellar Resources is a relatively low-growth company, having no debt on its balance sheet isn’t necessarily the best thing. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and whether the company needs financial flexibility at this point in time. I recommend taking a look into a future growth analysis to account for what the market expects for the company moving forward.

Are you a potential investor? SRZ’s health in terms of financial liquidity should ease potential investors’ concerns. Though, its low sales growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. Keep in mind I haven’t considered other factors such as how SRZ has been performing in the past. I encourage you to continue your research by taking a look at SRZ’s past performance to figure out SRZ’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.