Chalice Gold Mines Limited (ASX:CHN), 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 CHN will have to follow strict debt obligations which will reduce its financial flexibility. While CHN has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for Chalice Gold Mines
Does CHN’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 CHN’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 CHN is a high-growth company. A double-digit revenue growth of 26.89% is considered relatively high for a small-cap company like CHN. 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 CHN’s liquid assets cover its short-term commitments?
Since Chalice Gold Mines 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 A$1.6M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$53.0M, with a current ratio of 32.47x. Though, anything above 3x is considered high and could mean that CHN has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for CHN to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may change. I suggest keeping abreast of market expectations for CHN’s future growth.