Zero-debt allows substantial financial flexibility, especially for small-cap companies like BIG Blockchain Intelligence Group Inc. (CNSX:BIGG), 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. 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 take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for BIG Blockchain Intelligence Group
Is BIGG 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. The lack of debt on BIGG’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 BIGG is a high-growth company. BIGG delivered a negative revenue growth of -31%. 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.
Can BIGG meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, BIG Blockchain Intelligence Group 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 BIGG’s CA$390k in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CA$15m, with a current ratio of 39.69x. Having said that, a ratio above 3x may be considered excessive by some investors.
Next Steps:
Having no debt on the books means BIGG has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around BIGG’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how BIGG has been performing in the past. I recommend you continue to research BIG Blockchain Intelligence Group to get a more holistic view of the stock by looking at:
- Valuation: What is BIGG 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 BIGG is currently mispriced by the market.
- Historical Performance: What has BIGG’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.