Chuy’s Holdings Inc (NASDAQ:CHUY), 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 CHUY will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CHUY has outstanding financial strength. I recommend you look at the following hurdles to assess CHUY’s financial health. View our latest analysis for Chuy’s Holdings
Is CHUY right in choosing 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. CHUY’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. CHUY’s revenue growth in the teens of 15.17% is not considered as high-growth, especially for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can CHUY pay its short-term liabilities?
Since Chuy’s Holdings 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 CHUY’s most recent $28.1M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of $27.7M, with a current ratio of 0.99x below the prudent level of 3x.
Are you a shareholder? As CHUY’s revenues are not growing at a fast enough pace, 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. I recommend taking a look into a future growth analysis to account for the company’s position.
Are you a potential investor? CHUY’s financial health in terms of its liquidity shouldn’t be a concern for potential investors. However, its soft revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. Keep in mind I haven’t considered other factors such as how CHUY has been performing in the past. You should continue your analysis by taking a look at CHUY’s past performance to conclude on CHUY’s financial health.