What You Must Know About Insteel Industries Inc's (NASDAQ:IIIN) Financial Health

The direct benefit for Insteel Industries Inc (NASDAQ:IIIN), 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 IIIN 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. Check out our latest analysis for Insteel Industries

Does IIIN's growth rate justify its decision for financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 IIIN 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. IIIN delivered a negative revenue growth of -7.09%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can IIIN meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, Insteel Industries 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. At the current liabilities level of US$42.32M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$160.19M, leading to a 3.79x current account ratio. However, a ratio greater than 3x may be considered as too high, as IIIN could be holding too much capital in a low-return investment environment.

Next Steps:

Given that Insteel Industries is a relatively low-growth company, not taking advantage of lower cost debt may not be the best strategy. Shareholders should understand why the company isn't opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. This is only a rough assessment of financial health, and I'm sure IIIN has company-specific issues impacting its capital structure decisions. You should continue to research Insteel Industries to get a more holistic view of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for IIIN’s future growth? Take a look at our free research report of analyst consensus for IIIN’s outlook.
• 2. Valuation: What is IIIN 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 IIIN is currently mispriced by the market.
• 3. 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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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.