Münchener Tierpark Hellabrunn AG (MUN:MTP), 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 MTP will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean MTP has outstanding financial strength. I recommend you look at the following hurdles to assess MTP’s financial health. See our latest analysis for Münchener Tierpark Hellabrunn
Is MTP right in choosing 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 MTP’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 MTP is a high-growth company. A single-digit revenue growth of 2.75% for MTP 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 MTP pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Münchener Tierpark Hellabrunn 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. At the current liabilities level of €3.22m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. For Hospitality companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Having no debt on the books means MTP has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure MTP has company-specific issues impacting its capital structure decisions. You should continue to research Münchener Tierpark Hellabrunn to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MTP’s future growth? Take a look at our free research report of analyst consensus for MTP’s outlook.
- Historical Performance: What has MTP’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.