The direct benefit for SciBase Holding AB (publ) (STO:SCIB), 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 SCIB will have to adhere to stricter debt covenants and have less 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 go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
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Is SCIB right in choosing 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. SCIB’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, SCIB’s negative revenue growth of -2.2% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can SCIB meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, SciBase Holding 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. With current liabilities at kr10m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.71x. Having said that, a ratio above 3x may be considered excessive by some investors.
As a high-growth company, it may be beneficial for SCIB 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, SCIB’s financial situation may change. Keep in mind I haven’t considered other factors such as how SCIB has been performing in the past. I suggest you continue to research SciBase Holding to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SCIB’s future growth? Take a look at our free research report of analyst consensus for SCIB’s outlook.
- Historical Performance: What has SCIB’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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.