The direct benefit for ProMIS Neurosciences, Inc. (TSE:PMN), 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 PMN will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean PMN has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Is PMN right in choosing financial flexibility over 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 PMN 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. PMN delivered a negative revenue growth of -98%. 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 PMN’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, ProMIS Neurosciences 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 PMN’s CA$754k in current liabilities, the company has been able to meet these commitments with a current assets level of CA$5.1m, leading to a 6.82x current account ratio. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
PMN’s soft top-line growth means being in a zero-debt position isn’t always optimal. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for PMN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research ProMIS Neurosciences to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PMN’s future growth? Take a look at our free research report of analyst consensus for PMN’s outlook.
- Historical Performance: What has PMN’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.
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.