NGSC Limited (SGX:B07), 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 B07 will have to follow strict debt obligations which will reduce its financial flexibility. While B07 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess B07’s financial health. View out our latest analysis for NGSC
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on B07’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 B07 is a high-growth company.
Can B07 pay its short-term liabilities?
Since NGSC 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. At the current liabilities level of S$3.64m liabilities, the company has been able to meet these obligations given the level of current assets of S$20.81m, with a current ratio of 5.72x. However, anything above 3x is considered high and could mean that B07 has too much idle capital in low-earning investments.
As a high-growth company, it may be beneficial for B07 to have some financial flexibility, hence zero-debt. Since there is also no concerns around B07’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for B07’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NGSC to get a more holistic view of the stock by looking at:
- Historical Performance: What has B07’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.