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Is San Juan Basin Royalty Trust’s (SJT) Liquidity As Good As Its Solvency?

San Juan Basin Royalty Trust (NYSE:SJT), 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 SJT 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 SJT 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 San Juan Basin Royalty Trust

Is SJT growing fast enough to value financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. SJT’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. SJT delivered a negative revenue growth of -10.21%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.

NYSE:SJT Historical Debt Dec 9th 17
NYSE:SJT Historical Debt Dec 9th 17

Can SJT pay its short-term liabilities?

Given zero long-term debt on its balance sheet, San Juan Basin Royalty Trust has no solvency issues, which is 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 $2.9M 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 1.34x. For oil and gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Next Steps:

Are you a shareholder? Having no debt on the books means SJT has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around SJT’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. You should always be researching market expectations for SJT’s future growth.

Are you a potential investor? SJT’s high growth makes financial flexibility an attractive option. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to also analyse the company’s track record. You should continue your analysis by taking a look at SJT’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.

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