The direct benefit for 360 Blockchain Inc. (CNSX:CODE), 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 CODE will have to adhere to stricter debt covenants and have less 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 recommend you look at the following hurdles to assess CODE’s financial health.
Is CODE right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 CODE’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 CODE is a high-growth company. CODE delivered a negative revenue growth of -110%. 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 CODE pay its short-term liabilities?
Given zero long-term debt on its balance sheet, 360 Blockchain has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at CODE’s CA$70k in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 26.98x. However, a ratio above 3x may be considered excessive by some investors.
Given that 360 Blockchain is a relatively low-growth company, having no debt on its balance sheet isn’t necessarily the best thing. As shareholders, you should try and determine whether this strategy is justified for CODE, and why financial flexibility is needed at this stage in its business cycle. Keep in mind I haven’t considered other factors such as how CODE has been performing in the past. I suggest you continue to research 360 Blockchain to get a better picture of the stock by looking at:
- Historical Performance: What has CODE’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 firstname.lastname@example.org.