Izolacja Jarocin Spolka Akcyjna (WSE:IZO), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is IZO will have to follow strict debt obligations which will reduce its financial flexibility. While IZO 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.
Does IZO’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. 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. Either IZO 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 single-digit revenue growth of 4.2% for IZO is considerably low for a small-cap company. More capital can help the business grow faster. If IZO is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can IZO pay its short-term liabilities?
Since Izolacja Jarocin Spolka Akcyjna 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. At the current liabilities level of zł7.3m, the company has been able to meet these obligations given the level of current assets of zł15m, with a current ratio of 2.06x. For Basic Materials companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
IZO 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 IZO’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 IZO has been performing in the past. I recommend you continue to research Izolacja Jarocin Spolka Akcyjna to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IZO’s future growth? Take a look at our free research report of analyst consensus for IZO’s outlook.
- Valuation: What is IZO 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 IZO 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.
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