Yahoo Finance What does Aminex PLC’s (LON:AEX) Balance Sheet Tell Us About Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Aminex PLC (LON:AEX), 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.
See our latest analysis for Aminex
Does AEX’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. AEX’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. Opposite to the high growth we were expecting, AEX’s negative revenue growth of -74% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does AEX’s liquid assets cover its short-term commitments?
Since Aminex doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$9.1m, it seems that the business has been able to meet these obligations given the level of current assets of US$12m, with a current ratio of 1.37x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for AEX to have some financial flexibility, hence zero-debt. Since there is also no concerns around AEX’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure AEX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aminex to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AEX’s future growth? Take a look at our free research report of analyst consensus for AEX’s outlook.
Valuation: What is AEX 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 AEX 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 editorial-team@simplywallst.com.
