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Is Peninsula Mines Limited’s (ASX:PSM) Balance Sheet Strong Enough To Weather A Storm?

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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Peninsula Mines Limited (ASX:PSM), 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 PSM has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess PSM’s financial health.

See our latest analysis for Peninsula Mines

Is PSM growing fast enough to value financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. PSM’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. PSM delivered a strikingly high triple-digit revenue growth over the past year, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.

ASX:PSM Historical Debt February 6th 19
ASX:PSM Historical Debt February 6th 19

Does PSM’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Peninsula 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. Looking at PSM’s AU$245k in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$652k, with a current ratio of 2.66x. For Metals and Mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

Having no debt on the books means PSM has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around PSM’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 PSM has company-specific issues impacting its capital structure decisions. You should continue to research Peninsula Mines to get a better picture of the stock by looking at:

  1. Historical Performance: What has PSM’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.

  2. 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.