Zeus Resources Limited (ASX:ZEU), 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 ZEU will have to follow strict debt obligations which will reduce its financial flexibility. While ZEU 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 ZEU’s financial health. Check out our latest analysis for Zeus Resources
Is ZEU growing fast enough to value 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. ZEU’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. Opposite to the high growth we were expecting, ZEU’s negative revenue growth of -25.39% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ZEU pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Zeus Resources has no solvency issues, which is 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$0.1M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$2.6M, with a current ratio of 17.61x. Though, anything above 3x is considered high and could mean that ZEU has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? As ZEU’s revenues are not growing at a fast enough pace, having no debt on its balance sheet isn’t necessarily the best thing. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to examine the company’s position.
Are you a potential investor? The company’s current holding of liquid assets gives it some level of security in any case of adverse events. But, a relatively low revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. This is only a rough assessment of financial health, and I’m sure ZEU has company-specific issues impacting its capital structure decisions. You should continue your analysis by taking a look at ZEU’s past performance to figure out ZEU’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.