Breaker Resources NL (ASX:BRB), 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 BRB 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 BRB has outstanding financial strength. I recommend you look at the following hurdles to assess BRB’s financial health. View our latest analysis for Breaker Resources NL
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 BRB 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, BRB’s negative revenue growth of -66.65% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can BRB meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Breaker Resources NL 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. At the current liabilities level of A$0.9M 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 8.21x. However, anything about 3x may be excessive, since BRB may be leaving too much capital in low-earning investments.
Next Steps:
Are you a shareholder? Since BRB is a low-growth stock in terms of its revenues, being in a zero-debt position isn’t always optimal. 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. You should take a look into a future growth analysis to account for what the market expects for the company moving forward.
Are you a potential investor? BRB’s health in terms of financial liquidity should ease potential investors’ concerns. But, its low sales growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. I admit this is a fairly basic analysis for BRB’s financial health. Other important fundamentals need to be considered alongside. You should continue your analysis by taking a look at BRB’s past performance to conclude on BRB’s financial health.
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.