Zero-debt allows substantial financial flexibility, especially for small-cap companies like MITCON Consultancy & Engineering Services Limited (NSE:MITCON), 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 MITCON has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for MITCON Consultancy & Engineering Services
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. MITCON’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. MITCON’s revenue growth over the past year is a double-digit 33% 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 MITCON meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, MITCON Consultancy & Engineering Services 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. At the current liabilities level of ₹113m liabilities, the company has been able to meet these obligations given the level of current assets of ₹460m, with a current ratio of 4.06x. Having said that, anything above 3x may be considered excessive by some investors. They might argue MITCON is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means MITCON has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around MITCON’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure MITCON has company-specific issues impacting its capital structure decisions. You should 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 editorial-team@simplywallst.com.