Yahoo Finance How Financially Strong Is Thomson Resources Ltd (ASX:TMZ)?
Thomson Resources Ltd (ASX:TMZ), 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 TMZ will have to follow strict debt obligations which will reduce its financial flexibility. While TMZ 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 TMZ’s financial health.
Check out our latest analysis for Thomson Resources
Does TMZ’s growth rate justify its decision for 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. TMZ’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. TMZ 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 TMZ pay its short-term liabilities?
Since Thomson 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 TMZ’s AU$136k in current liabilities, the company has been able to meet these obligations given the level of current assets of AU$825k, with a current ratio of 6.07x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Next Steps:
TMZ is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around TMZ’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, TMZ’s financial situation may change. I admit this is a fairly basic analysis for TMZ’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Thomson Resources to get a more holistic view of the stock by looking at:
Valuation: What is TMZ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TMZ is currently mispriced by the market.
Historical Performance: What has TMZ’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.
