The direct benefit for Velcan Holdings Société anonyme (EPA:ALVEL), 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 ALVEL will have to adhere to stricter debt covenants and have less financial flexibility. While ALVEL has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is ALVEL 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. ALVEL’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. ALVEL delivered a negative revenue growth of -16%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ALVEL meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Velcan Holdings Société anonyme 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 €1m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 93.66x. Having said that, anything above 3x may be considered excessive by some investors.
As a high-growth company, it may be beneficial for ALVEL to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure ALVEL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Velcan Holdings Société anonyme to get a better picture of the stock by looking at:
- Historical Performance: What has ALVEL’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.
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.
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