Zero-debt allows substantial financial flexibility, especially for small-cap companies like Revance Therapeutics Inc (NASDAQ:RVNC), 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 RVNC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for Revance Therapeutics
Does RVNC'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. 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. Either RVNC 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. RVNC’s revenue growth over the past year was an impressively high triple-digit rate, 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.
Can RVNC meet its short-term obligations with the cash in hand?
Since Revance Therapeutics 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$28.3m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.58x. Having said that, anything above 3x may be considered excessive by some investors. They might argue RVNC is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means RVNC has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around RVNC's liquidity needs, this may be its optimal capital structure for the time being. Going forward, RVNC's financial situation may change. Keep in mind I haven't considered other factors such as how RVNC has been performing in the past. You should continue to research Revance Therapeutics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RVNC’s future growth? Take a look at our free research report of analyst consensus for RVNC’s outlook.
- Valuation: What is RVNC 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 RVNC 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.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.