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 will take you through a few basic checks to assess the financial health of companies with no debt.
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. A revenue growth in the teens is not considered high-growth. CHUY’s revenue growth of 13% falls into this range. More capital can help the business grow faster. If CHUY is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can CHUY pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Chuy’s Holdings 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 CHUY’s US$25m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.86x.
As a high-growth company, it may be beneficial for CHUY to have some financial flexibility, hence zero-debt. However, its lack of liquidity lowers our conviction around meeting short-term commitments. Some level of low-cost debt funding could help meet these needs. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how CHUY has been performing in the past. I recommend you continue to research Chuy’s Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CHUY’s future growth? Take a look at our free research report of analyst consensus for CHUY’s outlook.
- Valuation: What is CHUY 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 CHUY 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 email@example.com.