Is AVZ Minerals Limited’s (ASX:AVZ) Balance Sheet Strong Enough To Weather A Storm?

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AVZ Minerals Limited (ASX:AVZ), 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 AVZ will have to follow strict debt obligations which will reduce its financial flexibility. While AVZ 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.

View our latest analysis for AVZ Minerals

Is AVZ right in choosing financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 AVZ’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 AVZ is a high-growth company. AVZ delivered a strikingly high triple-digit revenue growth over the past year, 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.

ASX:AVZ Historical Debt February 7th 19

Can AVZ pay its short-term liabilities?

Since AVZ Minerals 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. Looking at AVZ’s AU$3.3m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$16m, with a current ratio of 4.91x. Having said that, a ratio above 3x may be considered excessive by some investors.

Next Steps:

Having no debt on the books means AVZ has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around AVZ’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how AVZ has been performing in the past. I suggest you continue to research AVZ Minerals to get a more holistic view of the stock by looking at:

1. Historical Performance: What has AVZ’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.

2. 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.