Zero-debt allows substantial financial flexibility, especially for small-cap companies like Cygnus Gold Limited (ASX:CY5), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While CY5 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 CY5’s financial health.
Check out our latest analysis for Cygnus Gold
Is CY5 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. CY5’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. CY5 delivered a strikingly high triple-digit revenue growth over the past year, 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.
Can CY5 meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Cygnus Gold 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 AU$342k, it appears that the company has been able to meet these obligations given the level of current assets of AU$4.3m, with a current ratio of 12.61x. Having said that, many consider a ratio above 3x to be high.
CY5 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. Moving forward, CY5’s financial situation may change. Keep in mind I haven’t considered other factors such as how CY5 has been performing in the past. I suggest you continue to research Cygnus Gold to get a better picture of the stock by looking at:
- Historical Performance: What has CY5’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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.
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