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Ashley Services Group Limited (ASX:ASH), 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 ASH 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 ASH 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 ASH’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on ASH’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if ASH is a high-growth company. A single-digit revenue growth of 5.8% for ASH is considerably low for a small-cap company. More capital can help the business grow faster. If ASH is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can ASH pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Ashley Services Group 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. At the current liabilities level of AU$18m, it seems that the business has been able to meet these commitments with a current assets level of AU$37m, leading to a 2x current account ratio. Usually, for Professional Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
ASH is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may change. This is only a rough assessment of financial health, and I’m sure ASH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ashley Services Group to get a better picture of the stock by looking at:
- Historical Performance: What has ASH’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.
- 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 firstname.lastname@example.org.