Is Travel24.com AG’s (FRA:TVD6) Balance Sheet Strong Enough To Weather A Storm?

The direct benefit for Travel24.com AG (FRA:TVD6), 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 TVD6 will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean TVD6 has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

View our latest analysis for Travel24.com

Is TVD6 right in choosing financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. TVD6’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. TVD6’s revenue growth over the past year is a double-digit 43% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.

DB:TVD6 Historical Debt December 26th 18
DB:TVD6 Historical Debt December 26th 18

Can TVD6 meet its short-term obligations with the cash in hand?

Since Travel24.com 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at €5.2m, it seems that the business may not have an easy time meeting these commitments with a current assets level of €5.0m, leading to a current ratio of 0.96x.

Next Steps:

As a high-growth company, it may be beneficial for TVD6 to have some financial flexibility, hence zero-debt. However, the company’s low liquidity reduces our conviction around meeting short-term commitments. Some level of low-cost debt funding could help meet these needs. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how TVD6 has been performing in the past. You should continue to research Travel24.com to get a better picture of the stock by looking at:

  1. Historical Performance: What has TVD6’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.
  2. 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.