Any company, including Mood Media Corporation (TSX:MM) 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 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 estimate 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, Mood Media 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 Mood Media’s financial strength analysis lot more stressful, there are other metrics to check its financial health. These are a few basic checks to assess the financial health of companies with no debt. View our latest analysis for Mood Media
Is Mood Media growing fast enough to value financial flexibility over lower cost of capital?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like MM with its market cap of USD $9 Million as they have limited capability of raising large sums through capital markets. However, choosing financial flexibility over capital returns is logical only if it’s a high-growth company. To pass this criterion, I put a benchmark figure of 20% revenue growth for any company opting zero long-term debt versus the higher returns for shareholders. On the flip-side, MM saw a -1.5% contraction in revenue over the past 12 months. While its low growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can MM meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Mood Media 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 MM’s case, its short-term assets of $150 Million exceed the short-term liabilities of $126 Million, indicating sound liquidity position.
Conclusion
Mood Media has no long-term balance sheet, so there’s no bankruptcy risk. Additionally, with its liquid assets exceeding the short-term obligations, the company faces no liquidity issues. However, the company’s -1.5% growth rate raises concern over its decision to remain a zero-debt company. Now I recommend you check out our latest free analysis report to see what are MM’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Mood Media anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.
