Is ReNeuron Group plc (LON:RENE) As Financially Strong As Its Balance Sheet Indicates?

The direct benefit for ReNeuron Group plc (AIM:RENE), 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 RENE 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 RENE 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. Check out our latest analysis for ReNeuron Group

Does RENE's growth rate justify its decision for 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. Either RENE does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. RENE’s revenue growth over the past year is an impressively high double-digit 59.86%. 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.

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

Given zero long-term debt on its balance sheet, ReNeuron Group 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. At the current liabilities level of UK£5.70M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.19x. Though, a ratio greater than 3x may be considered as too high, as RENE could be holding too much capital in a low-return investment environment.

Next Steps:

Having no debt on the books means RENE 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. Going forward, RENE's financial situation may change. Keep in mind I haven't considered other factors such as how RENE has been performing in the past. You should continue to research ReNeuron Group to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for RENE’s future growth? Take a look at our free research report of analyst consensus for RENE’s outlook.
• 2. Historical Performance: What has RENE'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.
• 3. 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.