Dawine Limited (ASX:DW8), 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 DW8 will have to follow strict debt obligations which will reduce its financial flexibility. While DW8 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 DW8’s financial health. See our latest analysis for DW8
Is DW8 right in choosing financial flexibility over 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. DW8’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.
Can DW8 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Dawine 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. Looking at DW8’s most recent A$0.2M 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 17.14x. Though, a ratio greater than 3x may be considered as too high, as DW8 could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for DW8 to have some financial flexibility, hence zero-debt. Since there is also no concerns around DW8’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, DW8’s financial situation may change. I suggest keeping abreast of market expectations for DW8’s future growth.
Are you a potential investor? DW8’s high growth makes financial flexibility an attractive option. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at DW8’s past performance to figure out DW8’s financial health position.
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.