What Is Regal Petroleum plc’s (LON:RPT) Financial Position?
Regal Petroleum plc (AIM:RPT), 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 RPT 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 RPT 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. View our latest analysis for Regal Petroleum
Does RPT’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. RPT’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. RPT’s revenue growth over the past year is a double-digit 38.44% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can RPT meet its short-term obligations with the cash in hand?
Since Regal Petroleum 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 $1.7M 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 14.64x. Though, anything about 3x may be excessive, since RPT may be leaving too much capital in low-earning investments.
Next Steps:
Are you a shareholder? RPT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around RPT’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I recommend keeping abreast of market expectations for RPT’s future growth.
Are you a potential investor? Regal Petroleum is a fast-growing company, making financial flexibility a valuable option for the company. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to also examine RPT’s track record. I encourage you to continue your research by taking a look at RPT’s past performance in order to determine for yourself whether its zero-debt position is justified.
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.
