Yahoo Finance Is Jupiter Mines Limited (ASX:JMS) A Financially Sound Company?
Jupiter Mines Limited (ASX:JMS), 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 JMS will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean JMS has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for Jupiter Mines
Is JMS growing fast enough to value 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. The lack of debt on JMS’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 JMS is a high-growth company. Opposite to the high growth we were expecting, JMS’s negative revenue growth of -100% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can JMS meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Jupiter Mines has no solvency issues, which is 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. At the current liabilities level of AU$41m, it appears that the company has been able to meet these commitments with a current assets level of AU$63m, leading to a 1.53x current account ratio. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
JMS’s soft top-line growth means not taking advantage of lower cost debt may not be the best strategy. As shareholders, you should try and determine whether this strategy is justified for JMS, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for JMS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Jupiter Mines to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JMS’s future growth? Take a look at our free research report of analyst consensus for JMS’s outlook.
Valuation: What is JMS 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 JMS is currently mispriced by the market.
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.
