Yahoo Finance Acrux Limited (ASX:ACR): Time For A Financial Health Check
Acrux Limited (ASX:ACR), 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 ACR will have to follow strict debt obligations which will reduce its financial flexibility. While ACR 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.
Check out our latest analysis for Acrux
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. ACR’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, ACR’s negative revenue growth of -86% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ACR meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Acrux 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$2.5m, the company has been able to meet these obligations given the level of current assets of AU$29m, with a current ratio of 11.66x. However, many consider a ratio above 3x to be high.
Next Steps:
As ACR’s revenues are not growing at a fast enough pace, not having any low-cost debt funding may not be optimal for the business. 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. This is only a rough assessment of financial health, and I’m sure ACR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Acrux to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ACR’s future growth? Take a look at our free research report of analyst consensus for ACR’s outlook.
Historical Performance: What has ACR’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
