Joint Stock Company “World Trade Center Moscow” (MISX:WTCM), 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 WTCM will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for World Trade Center Moscow
Does WTCM’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on WTCM’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 WTCM is a high-growth company. A single-digit revenue growth of 4.88% for WTCM is considerably low 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.
Can WTCM pay its short-term liabilities?
At the current liabilities level of RUРУБ1.30B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.32x. Though, a ratio greater than 3x may be considered as too high, as WTCM could be holding too much capital in a low-return investment environment.
Next Steps:
Since WTCM is a low-growth stock in terms of its revenues, not taking advantage of lower cost debt may not be the best strategy. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for WTCM’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research World Trade Center Moscow to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. Valuation: What is WTCM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether WTCM is currently mispriced by the market.
- 2. Historical Performance: What has WTCM’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 WTCM’s historicals for more clarity.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.