Zero-debt allows substantial financial flexibility, especially for small-cap companies like Tinybeans Group Limited (ASX:TNY), 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 TNY 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 TNY’s financial health.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either TNY 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. TNY’s revenue growth over the past year is an impressively high double-digit 62%. 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 TNY meet its short-term obligations with the cash in hand?
Since Tinybeans Group 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. With current liabilities at AU$1m, it appears that the company has been able to meet these commitments with a current assets level of AU$5m, leading to a 4.59x current account ratio. However, a ratio greater than 3x may be considered as quite high.
As a high-growth company, it may be beneficial for TNY to have some financial flexibility, hence zero-debt. Since there is also no concerns around TNY’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, TNY’s financial situation may change. This is only a rough assessment of financial health, and I’m sure TNY has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tinybeans Group to get a better picture of the stock by looking at:
- Historical Performance: What has TNY’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.
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