Zero-debt allows substantial financial flexibility, especially for small-cap companies like National Presto Industries Inc (NYSE:NPK), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean NPK has outstanding financial strength. 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.
Does NPK’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. NPK’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. NPK delivered a negative revenue growth of -3.3%. 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.
Does NPK’s liquid assets cover its short-term commitments?
Since National Presto Industries 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. 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 NPK’s most recent US$42m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$315m, with a current ratio of 7.47x. Having said that, many consider anything above 3x to be quite high and could mean that NPK has too much idle capital in low-earning investments.
NPK is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around NPK’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, NPK’s financial situation may change. Keep in mind I haven’t considered other factors such as how NPK has been performing in the past. I suggest you continue to research National Presto Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NPK’s future growth? Take a look at our free research report of analyst consensus for NPK’s outlook.
- Valuation: What is NPK 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 NPK 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.
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