Talisman Mining Limited (ASX:TLM), 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 TLM will have to follow strict debt obligations which will reduce its financial flexibility. While TLM has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess TLM’s financial health.
Is TLM 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. TLM’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. Opposite to the high growth we were expecting, TLM’s negative revenue growth of -85% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does TLM’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Talisman Mining has no solvency issues, which is 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. With current liabilities at AU$19m, it seems that the business has been able to meet these commitments with a current assets level of AU$22m, leading to a 1.19x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means TLM has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around TLM’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. This is only a rough assessment of financial health, and I’m sure TLM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Talisman Mining to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TLM’s future growth? Take a look at our free research report of analyst consensus for TLM’s outlook.
- Valuation: What is TLM 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 TLM 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.
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