The direct benefit for PINCHme.com Inc. (ASX:PIN), 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 PIN will have to adhere to stricter debt covenants and have less financial flexibility. 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 recommend you look at the following hurdles to assess PIN’s financial health.
Is PIN growing fast enough to value 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. Either PIN 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. PIN’s revenue growth of 18% falls into this range. More capital can help the business grow faster. If PIN is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can PIN meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, PINCHme.com 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 US$2.1m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.53x. Generally, for Interactive Media and Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
PIN is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around PIN’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure PIN has company-specific issues impacting its capital structure decisions. You should continue to research PINCHme.com to get a more holistic view of the stock by looking at:
- Historical Performance: What has PIN’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.
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