The direct benefit for MITCON Consultancy & Engineering Services Limited (NSE:MITCON), 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 MITCON 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 MITCON has outstanding financial strength. I recommend you look at the following hurdles to assess MITCON’s financial health.
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Is MITCON right in choosing 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. Either MITCON 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. A double-digit revenue growth of 33% is considered relatively high for a small-cap company like MITCON. 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 MITCON meet its short-term obligations with the cash in hand?
Since MITCON Consultancy & Engineering Services 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. With current liabilities at ₹113m, it appears that the company has been able to meet these obligations given the level of current assets of ₹460m, with a current ratio of 4.06x. However, a ratio greater than 3x may be considered high by some.
As a high-growth company, it may be beneficial for MITCON to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, MITCON’s financial situation may change. I admit this is a fairly basic analysis for MITCON’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MITCON Consultancy & Engineering Services to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MITCON’s future growth? Take a look at our free research report of analyst consensus for MITCON’s outlook.
- Valuation: What is MITCON 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 MITCON 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.