Zero-debt allows substantial financial flexibility, especially for small-cap companies like Sylogist Ltd (TSXV:SYZ), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean SYZ has outstanding financial strength. I recommend you look at the following hurdles to assess SYZ’s financial health. Check out our latest analysis for Sylogist
Does SYZ’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 SYZ’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 SYZ is a high-growth company. SYZ’s revenue growth over the past year is a double-digit 31.07% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does SYZ’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Sylogist 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. At the current liabilities level of CA$13.7M 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 2.61x. Generally, for it companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Are you a shareholder? Given that Sylogist is a relatively low-growth company, being in a zero-debt position isn’t always optimal. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to examine the company’s position.
Are you a potential investor? SYZ’s health in terms of financial liquidity should ease potential investors’ concerns. However, its soft revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. This is only a rough assessment of financial health, and I’m sure SYZ has company-specific issues impacting its capital structure decisions. You should continue your analysis by taking a look at SYZ’s past performance to figure out SYZ’s financial health position.