Sandstorm Gold Ltd. (TSE:SSL): Time For A Financial Health Check
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The direct benefit for Sandstorm Gold Ltd. (TSE:SSL), 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 SSL 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 SSL has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for Sandstorm Gold
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. 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. Either SSL 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. SSL’s revenue growth over the past year is a single-digit 2.7% which is relatively low for a small-cap company. More capital can help the business grow faster. If SSL is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SSL pay its short-term liabilities?
Since Sandstorm Gold 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. 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. Looking at SSL’s US$4.8m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$26m, with a current ratio of 5.46x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
Having no debt on the books means SSL 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. Going forward, SSL’s financial situation may change. This is only a rough assessment of financial health, and I’m sure SSL has company-specific issues impacting its capital structure decisions. You should continue to research Sandstorm Gold to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SSL’s future growth? Take a look at our free research report of analyst consensus for SSL’s outlook.
Valuation: What is SSL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SSL is currently mispriced by the market.
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.
