The direct benefit for Freelancer Limited (ASX:FLN), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is FLN will have to adhere to stricter debt covenants and have less financial flexibility. While FLN 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 FLN’s financial health.
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Does FLN’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. Either FLN 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. Opposite to the high growth we were expecting, FLN’s negative revenue growth of -9.1% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can FLN pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Freelancer has no solvency issues, which is 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. At the current liabilities level of AU$38m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.98x.
FLN is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. However, its lack of liquidity reduces our conviction around meeting near-term commitments. Some level of low-cost debt funding could help address these needs. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure FLN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Freelancer to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FLN’s future growth? Take a look at our free research report of analyst consensus for FLN’s outlook.
- Valuation: What is FLN 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 FLN 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.
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 email@example.com.