The direct benefit for SafeCharge International Group Limited (LON:SCH), 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 SCH 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 SCH 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 SCH growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 SCH’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 SCH is a high-growth company. A revenue growth in the teens is not considered high-growth. SCH’s revenue growth of 20% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can SCH meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, SafeCharge International 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. With current liabilities at US$24m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.78x. Having said that, many consider anything above 3x to be quite high and could mean that SCH has too much idle capital in low-earning investments.
Having no debt on the books means SCH 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, its financial position may change. I admit this is a fairly basic analysis for SCH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SafeCharge International Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SCH’s future growth? Take a look at our free research report of analyst consensus for SCH’s outlook.
- Valuation: What is SCH 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 SCH 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.
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