Anchun International Holdings Ltd. (SGX:BTX), 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 BTX 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 go over a basic overview of the stock's financial health, which I believe provides a ballpark estimate of their financial health status.
Is BTX growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 BTX’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 BTX is a high-growth company. BTX’s revenue growth over the past year is a double-digit 44% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can BTX meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Anchun International Holdings 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 CN¥83m, the company has been able to meet these commitments with a current assets level of CN¥275m, leading to a 3.32x current account ratio. Having said that, a ratio greater than 3x may be considered high by some.
Having no debt on the books means BTX has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, BTX's financial situation may change. I admit this is a fairly basic analysis for BTX's financial health. Other important fundamentals need to be considered alongside. You should continue to research Anchun International Holdings to get a more holistic view of the stock by looking at:
- Historical Performance: What has BTX'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.
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