Huber+Suhner AG (VTX:HUBN), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is HUBN will have to follow strict debt obligations which will reduce its 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 HUBN’s financial health.
Check out our latest analysis for Huber+Suhner
Is HUBN 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. HUBN’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A single-digit revenue growth of 9.2% for HUBN is considerably low for a small-cap company. More capital can help the business grow faster. If HUBN is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can HUBN meet its short-term obligations with the cash in hand?
Since Huber+Suhner doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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 HUBN’s CHF136m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CHF526m, with a current ratio of 3.86x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Next Steps:
As a high-growth company, it may be beneficial for HUBN to have some financial flexibility, hence zero-debt. Since there is also no concerns around HUBN’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, HUBN’s financial situation may change. This is only a rough assessment of financial health, and I’m sure HUBN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Huber+Suhner to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HUBN’s future growth? Take a look at our free research report of analyst consensus for HUBN’s outlook.
- Valuation: What is HUBN 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 HUBN is currently mispriced by the market.
- 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.