Kulcs-Soft Számítástechnika Nyrt (BUSE:KULCSSOFT), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is KULCSSOFT will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean KULCSSOFT has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Does KULCSSOFT’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. Either KULCSSOFT 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. A revenue growth in the teens is not considered high-growth. KULCSSOFT’s revenue growth of 12% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does KULCSSOFT’s liquid assets cover its short-term commitments?
Since Kulcs-Soft Számítástechnika Nyrt 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. Looking at KULCSSOFT’s most recent Ft927m liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.65x.
KULCSSOFT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Though, the company’s low liquidity lowers our confidence around meeting short-term obligations. Some level of low-cost debt funding could help address these needs. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how KULCSSOFT has been performing in the past. You should continue to research Kulcs-Soft Számítástechnika Nyrt to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KULCSSOFT’s future growth? Take a look at our free research report of analyst consensus for KULCSSOFT’s outlook.
- Valuation: What is KULCSSOFT 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 KULCSSOFT 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.
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