Zero-debt allows substantial financial flexibility, especially for small-cap companies like Corline Biomedical AB (STO:CLBIO), 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 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.
See our latest analysis for Corline Biomedical
Does CLBIO'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. The lack of debt on CLBIO’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 CLBIO is a high-growth company. Opposite to the high growth we were expecting, CLBIO’s negative revenue growth of -62.5% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can CLBIO pay its short-term liabilities?
Since Corline Biomedical 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. With current liabilities at kr3.9m, the company has been able to meet these obligations given the level of current assets of kr28.3m, with a current ratio of 7.33x. However, anything about 3x may be excessive, since CLBIO may be leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means CLBIO has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around CLBIO's liquidity needs, this may be its optimal capital structure for the time being. Going forward, CLBIO's financial situation may change. I admit this is a fairly basic analysis for CLBIO's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Corline Biomedical to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLBIO’s future growth? Take a look at our free research report of analyst consensus for CLBIO’s outlook.
- Valuation: What is CLBIO 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 CLBIO 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.
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 editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.