Zero-debt allows substantial financial flexibility, especially for small-cap companies like Bojun Agriculture Holdings Limited (ASX:BAH), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? 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. View our latest analysis for Bojun Agriculture Holdings
Does BAH’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on BAH’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 BAH is a high-growth company. BAH delivered a strikingly high revenue growth of 65.61% over the past year. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can BAH meet its short-term obligations with the cash in hand?
Since Bojun Agriculture Holdings 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. At the current liabilities level of $1.3M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $29.0M, leading to a 22.26x current account ratio. However, anything above 3x is considered high and could mean that BAH has too much idle capital in low-earning investments.
Are you a shareholder? Having no debt on the books means BAH has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around BAH’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I suggest keeping on top of market expectations for BAH’s future growth.
Are you a potential investor? BAH’s high growth makes financial flexibility an attractive option. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also analyse BAH’s track record. I encourage you to continue your research by taking a look at BAH’s past performance to figure out BAH’s financial health position.