The direct benefit for Aqualis ASA (OB:AQUA), 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 AQUA 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 AQUA has outstanding financial strength. I recommend you look at the following hurdles to assess AQUA’s financial health. Check out our latest analysis for Aqualis
Does AQUA’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 AQUA 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. AQUA’s revenue growth in the teens of 12.35% is not considered as high-growth, especially for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does AQUA’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Aqualis 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. Looking at AQUA’s most recent US$4.89m liabilities, the company has been able to meet these obligations given the level of current assets of US$21.11m, with a current ratio of 4.31x. However, anything above 3x is considered high and could mean that AQUA has too much idle capital in low-earning investments.
Having no debt on the books means AQUA has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure AQUA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aqualis to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AQUA’s future growth? Take a look at our free research report of analyst consensus for AQUA’s outlook.
- Valuation: What is AQUA 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 AQUA 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.