Zero-debt allows substantial financial flexibility, especially for small-cap companies like Wey Education plc (AIM:WEY), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While WEY has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. 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. View our latest analysis for Wey Education
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 WEY’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 WEY is a high-growth company. WEY’s revenue growth over the past year is an impressively high double-digit 60.25%. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can WEY meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Wey Education has no solvency issues, which is 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 £0.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of £1.3M, with a current ratio of 1.96x. Usually, for consumer services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Are you a shareholder? WEY is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around WEY’s liquidity needs, this may be its optimal capital structure for the time being. In the future, WEY’s financial situation may change. I recommend keeping abreast of market expectations for WEY’s future growth.
Are you a potential investor? WEY’s high growth makes financial flexibility an attractive option. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also examine the company’s track record. As a following step, you should take a look at WEY’s past performance to conclude on WEY’s financial health.