Michael Canly February 2017
The direct benefit for Cape Lambert Resources Limited (ASX:CFE), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. The cost of debt is always less than that of equity as debt-holders have a superior claim over the company’s assets. In addition, interest on debt brings down taxable income, reducing the tax paid.
A drop in the cost of capital beefs up a company’s valuation as the same is used to discount its future cash flows to arrive at the intrinsic value — an anticipate of its worth right now. This is one of the reasons – given interest rates at record lows – that most companies tremendously raised debt in their capital structure over the past few years.
On the flip side, given the interest-rate hikes are a part of the economic cycle, Cape Lambert Resources will be in a stronger position compared to companies which would have to reduce debt due to rising interest-costs in such a scenario. Although zero-debt makes Cape Lambert Resources’s financial strength analysis lot more stressful, there are other metrics to check its financial health. Here’s a small checklist which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for Cape Lambert Resources Is Cape Lambert Resources right in choosing financial flexibility instead of a lower cost of capital?
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Cape Lambert Resources (ASX:CFE) Income Statement Feb 21st 17
For small-cap companies such as CFE with its market cap of USD $10 Million, financial flexibility is a valuable option. And currently operating on a smaller scale, they’re not wrong in choosing it over improved total shareholder returns. However, choosing financial flexibility over capital returns is logical only if it’s a high-growth company. To fulfil this criteria, I expect a company to generate more than 20% revenue growth. In a complete contrast, CFE’s revenue contracted -82.97% over the past year. If the company is not expecting exceptional future growth, then its decision to avoid debt may cost shareholders dearly in the long-term. Can CFE pay its short-term debts?
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Cape Lambert Resources (ASX:CFE) Net Worth Feb 21st 17
Given zero long-term debt on its balance sheet, Cape Lambert Resources has no solvency issues. Solvency is 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, which are mostly comprised of payments to suppliers, bank loans and debts due over the next twelve months. To cover them, a company must have more liquid assets than these obligations. In CFE’s case, its short-term assets of $8 Million exceed the short-term liabilities of $7 Million, indicating sound liquidity position.
CFE Price at posting:
2.6¢ Sentiment: Buy Disclosure: Held
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