The direct benefit for BLOK Technologies Inc (CNSX:BLK), 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 BLK 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 BLK has outstanding financial strength. I recommend you look at the following hurdles to assess BLK’s financial health.
Does BLK’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 BLK’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 BLK is a high-growth company. BLK delivered a negative revenue growth of -200%. 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 BLK’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, BLOK Technologies 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. With current liabilities at CA$341k, it seems that the business has been able to meet these obligations given the level of current assets of CA$4m, with a current ratio of 10.71x. However, many consider anything above 3x to be quite high and could mean that BLK has too much idle capital in low-earning investments.
BLK 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, BLK’s financial situation may change. This is only a rough assessment of financial health, and I’m sure BLK has company-specific issues impacting its capital structure decisions. You should continue to research BLOK Technologies to get a more holistic view of the stock by looking at:
- Historical Performance: What has BLK’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.
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