The direct benefit for Benitec Biopharma Limited (ASX:BLT), 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 BLT will have to adhere to stricter debt covenants and have less financial flexibility. While BLT 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 BLT’s financial health.
Is BLT growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 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 -58.4% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can BLT meet its short-term obligations with the cash in hand?
Since Benitec Biopharma 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$2.5m, it seems that the business has been able to meet these obligations given the level of current assets of AU$20.9m, with a current ratio of 8.2x. However, many consider anything above 3x to be quite high and could mean that BLT has too much idle capital in low-earning investments.
BLT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, BLT’s financial situation may change. This is only a rough assessment of financial health, and I’m sure BLT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Benitec Biopharma to get a more holistic view 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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