Zero-debt allows substantial financial flexibility, especially for small-cap companies like Benitec Biopharma Limited (ASX:BLT), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BLT has outstanding financial strength. 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.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 BLT 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, BLT’s negative revenue growth of -58% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does BLT’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Benitec Biopharma 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. With current liabilities at AU$2.5m, it seems that the business has been able to meet these obligations given the level of current assets of AU$21m, with a current ratio of 8.2x. Having said that, many consider a ratio above 3x to be high.
Having no debt on the books means BLT has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around BLT’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, BLT’s financial situation may change. I admit this is a fairly basic analysis for BLT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Benitec Biopharma to get a better picture of the stock by looking at:
- Historical Performance: What has BLT’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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