MOIL Limited (NSEI:MOIL), 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 MOIL will have to follow strict debt obligations which will reduce its financial flexibility. While MOIL 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 MOIL’s financial health. Check out our latest analysis for MOIL
Is MOIL 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. The lack of debt on MOIL’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if MOIL is a high-growth company. MOIL delivered a strikingly high revenue growth of 56.17% over the past year. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does MOIL’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, MOIL 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 ₹2,536.8M liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹25,847.5M, leading to a 10.19x current account ratio. Though, anything above 3x is considered high and could mean that MOIL has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? Having no debt on the books means MOIL has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around MOIL’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, MOIL’s financial situation may change. I recommend keeping on top of market expectations for MOIL’s future growth.
Are you a potential investor? MOIL is a fast-growing company, making financial flexibility a valuable option for the company. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to further analyse MOIL’s track record. As a following step, you should take a look at MOIL’s past performance to figure out MOIL’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.