Jindalee Resources Limited (ASX:JRL), 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 JRL 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 JRL has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for Jindalee Resources
Is JRL 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. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either JRL 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, JRL’s negative revenue growth of -18% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can JRL meet its short-term obligations with the cash in hand?
Since Jindalee Resources 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of AU$135k liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 17.26x. Having said that, many consider anything above 3x to be quite high.
Next Steps:
JRL is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, JRL’s financial situation may change. This is only a rough assessment of financial health, and I’m sure JRL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Jindalee Resources to get a better picture of the stock by looking at: