What does Freelancer Limited's (ASX:FLN) Balance Sheet Tell Us About Its Future?

Freelancer Limited (ASX:FLN), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is FLN will have to follow strict debt obligations which will reduce its 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 will go over a basic overview of the stock's financial health, which I believe provides a ballpark estimate of their financial health status.

Check out our latest analysis for Freelancer

Is FLN 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. 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 FLN 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. FLN delivered a negative revenue growth of -9.1%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.

Does FLN’s liquid assets cover its short-term commitments?

Since Freelancer 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$38m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.98x.

Next Steps:

FLN is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Though, the company's low liquidity reduces our conviction around meeting near-term commitments. Some level of low-cost debt funding could help address these needs. In the future, FLN's financial situation may change. Keep in mind I haven't considered other factors such as how FLN has been performing in the past. I recommend you continue to research Freelancer to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for FLN’s future growth? Take a look at our free research report of analyst consensus for FLN’s outlook.
2. Valuation: What is FLN 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 FLN is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.