Zero-debt allows substantial financial flexibility, especially for small-cap companies like CCID Consulting Company Limited (HKG:8235), 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. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will take you through a few basic checks to assess the financial health of companies with no debt.
Is 8235 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. The lack of debt on 8235’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 8235 is a high-growth company. 8235’s revenue growth over the past year is a double-digit 28% which is considerably high for a small-cap company. 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 8235 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, CCID Consulting 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. At the current liabilities level of CN¥88m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥206m, with a current ratio of 2.34x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
8235 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around 8235’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. Keep in mind I haven’t considered other factors such as how 8235 has been performing in the past. You should continue to research CCID Consulting to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 8235’s future growth? Take a look at our free research report of analyst consensus for 8235’s outlook.
- Valuation: What is 8235 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 8235 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.