The direct benefit for Zota Health Care Limited (NSE:ZOTA), 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 ZOTA will have to adhere to stricter debt covenants and have less financial flexibility. While ZOTA has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is ZOTA 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. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on ZOTA’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 ZOTA is a high-growth company. A single-digit revenue growth of 8.7% for ZOTA is considerably low for a small-cap company. More capital can help the business grow faster. If ZOTA is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does ZOTA’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Zota Health Care 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 ₹214m, the company has been able to meet these obligations given the level of current assets of ₹557m, with a current ratio of 2.61x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
As a high-growth company, it may be beneficial for ZOTA 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. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for ZOTA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Zota Health Care to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZOTA’s future growth? Take a look at our free research report of analyst consensus for ZOTA’s outlook.
- Historical Performance: What has ZOTA’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.
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 email@example.com.