Zero-debt allows substantial financial flexibility, especially for small-cap companies like Miricor Enterprises Holdings Limited (HKG:8358), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 8358 has outstanding financial strength. I recommend you look at the following hurdles to assess 8358’s financial health.
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Is 8358 growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. 8358’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. 8358’s revenue growth over the past year is a double-digit 24% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can 8358 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Miricor Enterprises Holdings 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 HK$104m, it seems that the business has been able to meet these obligations given the level of current assets of HK$182m, with a current ratio of 1.74x. Generally, for Consumer Services 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 8358 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 8358’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, 8358’s financial situation may change. I admit this is a fairly basic analysis for 8358’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Miricor Enterprises Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 8358’s future growth? Take a look at our free research report of analyst consensus for 8358’s outlook.
- Historical Performance: What has 8358’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.
- 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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