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Is Exore Resources Ltd’s (ASX:ERX) Balance Sheet Strong Enough To Weather A Storm?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Exore Resources Ltd (ASX:ERX), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ERX has outstanding 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 Exore Resources

Does ERX’s growth rate justify its decision for financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. 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. ERX’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.

ASX:ERX Historical Debt October 31st 18
ASX:ERX Historical Debt October 31st 18

Can ERX pay its short-term liabilities?

Since Exore Resources 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. 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. Looking at ERX’s most recent AU$293k liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$16m, leading to a 53.98x current account ratio. However, a ratio greater than 3x may be considered as quite high.

Next Steps:

As a high-growth company, it may be beneficial for ERX to have some financial flexibility, hence zero-debt. Since there is also no concerns around ERX’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, ERX’s financial situation may change. Keep in mind I haven’t considered other factors such as how ERX has been performing in the past. You should continue to research Exore Resources to get a more holistic view of the stock by looking at:

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  1. Historical Performance: What has ERX’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.