The direct benefit for National Presto Industries, Inc. (NYSE:NPK), 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 NPK 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.
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Is NPK growing fast enough to value 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 NPK 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. NPK’s revenue growth over the past year is a single-digit 1.0% which is relatively low for a small-cap company. More capital can help the business grow faster. If NPK is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can NPK pay its short-term liabilities?
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. 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$50m, it seems that the business has been able to meet these commitments with a current assets level of US$334m, leading to a 6.62x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
NPK is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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, its financial position may change. Keep in mind I haven’t considered other factors such as how NPK has been performing in the past. You should 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.