What Investors Should Know About Shield Therapeutics plc's (LON:STX) Financial Strength

Shield Therapeutics plc (LON:STX), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is STX will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean STX has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

Check out our latest analysis for Shield Therapeutics

Is STX growing fast enough to value financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. 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 STX’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 STX is a high-growth company. STX’s revenue growth over the past year was an impressively high triple-digit rate, 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 STX pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Shield Therapeutics 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 UK£3m, it appears that the company has been able to meet these commitments with a current assets level of UK£5m, leading to a 1.69x current account ratio. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

Having no debt on the books means STX 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, STX's financial situation may change. I admit this is a fairly basic analysis for STX's financial health. Other important fundamentals need to be considered alongside. You should continue to research Shield Therapeutics to get a more holistic view of the stock by looking at:

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

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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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.