The direct benefit for NGSC Limited (SGX:B07), 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 B07 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 project of their financial health status. See our latest analysis for NGSC
Does B07’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either B07 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.
Can B07 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, NGSC 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 B07’s most recent SGD8.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD24.4M, leading to a 2.73x current account ratio. For Telecom companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Having no debt on the books means B07 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, B07’s financial situation may change. I admit this is a fairly basic analysis for B07’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research NGSC to get a better picture of the stock by looking at:
- 1. 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.
- 2. 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.