Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The direct benefit for Cranswick plc (LON:CWK), 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 CWK 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 CWK has outstanding 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.
Is CWK 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. The lack of debt on CWK’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 CWK is a high-growth company. CWK’s revenue growth over the past year is a single-digit 6.5% which is relatively low for a small-cap company. More capital can help the business grow faster. If CWK is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does CWK’s liquid assets cover its short-term commitments?
Since Cranswick 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. At the current liabilities level of UK£157m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.66x. Usually, for Food companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
CWK 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 CWK's liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. Keep in mind I haven't considered other factors such as how CWK has been performing in the past. I suggest you continue to research Cranswick to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CWK’s future growth? Take a look at our free research report of analyst consensus for CWK’s outlook.
- Valuation: What is CWK 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 CWK 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 email@example.com.
If you're looking to trade Cranswick, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
Simply Wall St has no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020