Nkwe Platinum Limited (ASX:NKP), 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 NKP will have to follow strict debt obligations which will reduce its financial flexibility. While NKP has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Nkwe Platinum
Is NKP right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. The lack of debt on NKP’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 NKP is a high-growth company. NKP’s revenue growth over the past year is a double-digit 45.60% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does NKP’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Nkwe Platinum 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. With current liabilities at A$0.3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$6.1M, with a current ratio of 19.22x. Though, a ratio greater than 3x may be considered as too high, as NKP could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? Having no debt on the books means NKP has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around NKP’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I suggest researching market expectations for NKP’s future growth.
Are you a potential investor? NKP’s high growth makes financial flexibility an attractive option. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also analyse the company’s track record. I encourage you to continue your research by taking a look at NKP’s past performance to conclude on NKP’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.