Chant West Holdings Limited (ASX:CWL), 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 CWL will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CWL 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. See our latest analysis for Chant West Holdings
Does CWL’s growth rate justify its decision for 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. The lack of debt on CWL’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 CWL is a high-growth company. CWL’s revenue growth in the teens of 10.48% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If CWL is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does CWL’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Chant West Holdings 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. Looking at CWL’s most recent AU$3.89m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$4.40m, with a current ratio of 1.13x. Generally, for Software companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Having no debt on the books means CWL has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around CWL’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for CWL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Chant West Holdings to get a better picture of the stock by looking at:
- Historical Performance: What has CWL’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.