Zero-debt allows substantial financial flexibility, especially for small-cap companies like MODE SA (WSE:MOE), 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. While MOE has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. View out our latest analysis for MODE
Does MOE’s growth rate justify its decision for financial flexibility over 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. MOE’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. Opposite to the high growth we were expecting, MOE’s negative revenue growth of -7.38% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does MOE’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, MODE 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. Looking at MOE’s most recent zł356.22k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of zł1.49m, with a current ratio of 4.17x. However, a ratio greater than 3x may be considered as too high, as MOE could be holding too much capital in a low-return investment environment.
MOE 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 MOE’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for MOE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MODE to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MOE’s future growth? Take a look at our free research report of analyst consensus for MOE’s outlook.
- Valuation: What is MOE 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 MOE 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.