I read this analysis awhile ago and found it interesting.
Is Alexium International Group Limited’s (ASX:AJX) Balance Sheet Strong Enough To Weather A Storm? Dane Simmons February 28, 2017
Any company, including Alexium International Group Limited (ASX:AJX) with no debt in its capital structure, would maximize capital returns by having an optimal capital structure, which includes debt. The debt reduces the overall cost of capital for the company. Due to its tax-benefits and legally-binding nature, it always costs less than equity.
A lower cost of capital increases a company’s valuation as it is the discount rate applied on future cash flows to calculate the present value; thus, indicating higher capital returns. 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, Alexium International Group 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 Alexium International Group’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. View our latest analysis for Alexium International Group
Can Alexium International Group’s growth rate justify focus on financial flexibility over lower cost of capital?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like AJX with its market cap of USD $156 Million as they have limited capability of raising large sums through capital markets. However, this makes sense only if the company has a competitive edge and it’s growing fast. Given AJX’s revenue growth stood at 4970.46% over the past year, the company’s decision to choose financial flexibility compared to increasing capital returns makes sense as it may need that funding under expected circumstances or to invest in more lucrative projects to fuel growth further.
Given zero long-term debt on its balance sheet, Alexium International Group 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 AJX’s case, its short-term assets of $13 Million exceed the short-term liabilities of $3 Million, indicating sound liquidity position.
Conclusion
Alexium International Group is a fast growing company with a revenue growth of 4970.46% over the past year, making financial flexibility a valuable option for the company. In addition, its current assets cover current liabilities, giving it enough liquidity to operate smoothly in the short-term. Now I recommend you check out our latest free analysis report to see what are AJX’s growth prospects and whether it could be considered an undervalued opportunity.
