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The direct benefit for Klingelnberg AG (VTX:KLIN), 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 KLIN 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on KLIN’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 KLIN is a high-growth company. A single-digit revenue growth of 8.8% for KLIN is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can KLIN pay its short-term liabilities?
Since Klingelnberg 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. At the current liabilities level of €78m, the company has been able to meet these obligations given the level of current assets of €171m, with a current ratio of 2.18x. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
As a high-growth company, it may be beneficial for KLIN to have some financial flexibility, hence zero-debt. Since there is also no concerns around KLIN’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, KLIN’s financial situation may change. This is only a rough assessment of financial health, and I’m sure KLIN has company-specific issues impacting its capital structure decisions. You should continue to research Klingelnberg to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KLIN’s future growth? Take a look at our free research report of analyst consensus for KLIN’s outlook.
- Valuation: What is KLIN 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 KLIN 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 firstname.lastname@example.org.