The direct benefit for BioServo Technologies AB (publ) (STO:BIOS), 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 BIOS 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 BIOS has outstanding financial strength. I recommend you look at the following hurdles to assess BIOS’s financial health. View out our latest analysis for BioServo Technologies
Is financial flexibility worth the 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. Either BIOS 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. BIOS’s revenue growth over the past year is a single-digit 1.92% which is relatively 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.
Does BIOS’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, BioServo Technologies 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 BIOS’s most recent kr3.44m liabilities, it seems that the business has been able to meet these commitments with a current assets level of kr44.60m, leading to a 12.96x current account ratio. However, a ratio greater than 3x may be considered as too high, as BIOS could be holding too much capital in a low-return investment environment.
As a high-growth company, it may be beneficial for BIOS 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 change. I admit this is a fairly basic analysis for BIOS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research BioServo Technologies to get a better picture of the stock by looking at:
- Historical Performance: What has BIOS’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.