Yahoo Finance Is Greenland Minerals Limited’s (ASX:GGG) Balance Sheet A Threat To Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Greenland Minerals Limited (ASX:GGG), 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for Greenland Minerals
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either GGG does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. GGG 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.
Can GGG pay its short-term liabilities?
Since Greenland 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. 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 GGG’s most recent AU$1.1m liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$7.9m, leading to a 7.43x current account ratio. However, anything above 3x is considered high and could mean that GGG has too much idle capital in low-earning investments.
Next Steps:
Having no debt on the books means GGG has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, GGG’s financial situation may change. I admit this is a fairly basic analysis for GGG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Greenland Minerals to get a more holistic view of the stock by looking at:
Historical Performance: What has GGG’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.
