The direct benefit for Blue Prism Group plc (LON:PRSM), 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 PRSM will have to adhere to stricter debt covenants and have less financial flexibility. While PRSM 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.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either PRSM 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. PRSM’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.
Does PRSM’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Blue Prism Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at PRSM’s UK£39m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of UK£74m, with a current ratio of 1.91x. Generally, for Software 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.
Having no debt on the books means PRSM has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around PRSM’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how PRSM has been performing in the past. I recommend you continue to research Blue Prism Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PRSM’s future growth? Take a look at our free research report of analyst consensus for PRSM’s outlook.
- Valuation: What is PRSM 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 PRSM 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 firstname.lastname@example.org.