The direct benefit for Straker Translations Limited (ASX:STG), 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 STG will have to adhere to stricter debt covenants and have less financial flexibility. While STG 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 STG’s financial health.
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Is STG right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 STG’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 STG is a high-growth company. STG’s revenue growth in the teens of 20% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If STG is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can STG meet its short-term obligations with the cash in hand?
Since Straker Translations 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 NZ$6.5m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.64x. Usually, for Interactive Media and Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Having no debt on the books means STG has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. Keep in mind I haven’t considered other factors such as how STG has been performing in the past. I recommend you continue to research Straker Translations to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STG’s future growth? Take a look at our free research report of analyst consensus for STG’s outlook.
- Valuation: What is STG 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 STG 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.