Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6516
    -0.0002 (-0.04%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • Bitcoin AUD

    107,416.09
    -1,031.41 (-0.95%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6044
    +0.0010 (+0.16%)
     
  • AUD/NZD

    1.0908
    +0.0006 (+0.05%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     

Is Panoramic Resources Limited’s (ASX:PAN) Balance Sheet Strong Enough To Weather A Storm?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Panoramic Resources Limited (ASX:PAN), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean PAN has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

Check out our latest analysis for Panoramic Resources

Is PAN 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 PAN 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. Opposite to the high growth we were expecting, PAN’s negative revenue growth of -86% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

ASX:PAN Historical Debt, March 1st 2019
ASX:PAN Historical Debt, March 1st 2019

Can PAN pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Panoramic Resources 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 PAN’s AU$8.2m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$43m, leading to a 5.29x current account ratio. Having said that, many consider a ratio above 3x to be high.

Next Steps:

As PAN’s revenues are not growing at a fast enough pace, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for PAN, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for PAN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Panoramic Resources to get a better picture of the stock by looking at:

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

  2. Valuation: What is PAN 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 PAN 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.