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What You Must Know About Silver Lake Resources Limited’s (ASX:SLR) Financial Strength

The direct benefit for Silver Lake Resources Limited (ASX:SLR), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is SLR will have to adhere to stricter debt covenants and have less financial flexibility. While SLR 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 SLR’s financial health.

View our latest analysis for Silver Lake Resources

Is SLR right in choosing financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either SLR 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. SLR’s revenue growth in the teens of 12% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If SLR is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.

ASX:SLR Historical Debt December 6th 18
ASX:SLR Historical Debt December 6th 18

Can SLR meet its short-term obligations with the cash in hand?

Since Silver Lake 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. With current liabilities at AU$32m, it appears that the company has been able to meet these obligations given the level of current assets of AU$128m, with a current ratio of 3.99x. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

Next Steps:

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

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  1. Future Outlook: What are well-informed industry analysts predicting for SLR’s future growth? Take a look at our free research report of analyst consensus for SLR’s outlook.

  2. Valuation: What is SLR 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 SLR is currently mispriced by the market.

  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.