Yahoo Finance Is Variscan Mines Limited (ASX:VAR) A Financially Sound Company?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Variscan Mines Limited (ASX:VAR), 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 take you through a few basic checks to assess the financial health of companies with no debt.
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Is financial flexibility worth the 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. Either VAR 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. VAR delivered a negative revenue growth of -2.7%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can VAR meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Variscan 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. At the current liabilities level of AU$967k, it appears that the company has been able to meet these commitments with a current assets level of AU$2.3m, leading to a 2.4x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Having no debt on the books means VAR has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around VAR’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I admit this is a fairly basic analysis for VAR’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Variscan Mines to get a more holistic view of the stock by looking at:
Historical Performance: What has VAR’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.
