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Is Galan Lithium Limited (ASX:GLN) A Financially Sound Company?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Galan Lithium Limited (ASX:GLN), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess GLN’s financial health.

Check out our latest analysis for Galan Lithium

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. 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 GLN’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 GLN is a high-growth company.

ASX:GLN Historical Debt October 24th 18
ASX:GLN Historical Debt October 24th 18

Can GLN pay its short-term liabilities?

Since Galan Lithium 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. At the current liabilities level of AU$361k liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.8x. Having said that, a ratio greater than 3x may be considered as quite high.

Next Steps:

As a high-growth company, it may be beneficial for GLN to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, GLN’s financial situation may change. This is only a rough assessment of financial health, and I’m sure GLN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Galan Lithium to get a better picture of the stock by looking at:

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  1. Valuation: What is GLN 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 GLN is currently mispriced by the market.

  2. Historical Performance: What has GLN’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.

  3. 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.