What does PCI-PAL PLC's (LON:PCIP) Balance Sheet Tell Us About Its Future?

PCI-PAL PLC (LON:PCIP), 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 PCIP will have to follow strict debt obligations which will reduce its financial flexibility. While PCIP 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.

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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 PCIP’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 PCIP is a high-growth company. A revenue growth in the teens is not considered high-growth. PCIP’s revenue growth of 14% falls into this range. More capital can help the business grow faster. If PCIP is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.

Can PCIP pay its short-term liabilities?

Since PCI-PAL 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£1.1m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.76x. However, many consider a ratio above 3x to be high.

Next Steps:

PCIP is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. I admit this is a fairly basic analysis for PCIP's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PCI-PAL to get a better picture of the stock by looking at:

1. Historical Performance: What has PCIP'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.
2. 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 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.