The direct benefit for Nickel Mines Limited (ASX:NIC), 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 NIC will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean NIC has outstanding financial strength. 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.
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Is NIC growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either NIC 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. NIC’s revenue growth over the past year is an impressively high double-digit 58%. 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 NIC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Nickel Mines has no solvency issues, which is 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. Looking at NIC’s US$4.0m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.64x.
As a high-growth company, it may be beneficial for NIC to have some financial flexibility, hence zero-debt. However, the company’s low liquidity lowers our conviction around meeting short-term obligations. Some level of low-cost debt funding could help address these needs. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure NIC has company-specific issues impacting its capital structure decisions. You should continue to research Nickel Mines to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NIC’s future growth? Take a look at our free research report of analyst consensus for NIC’s outlook.
- Valuation: What is NIC 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 NIC 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 firstname.lastname@example.org.