The direct benefit for ENGlobal Corporation (NASDAQ:ENG), 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 ENG will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ENG has outstanding financial strength. I recommend you look at the following hurdles to assess ENG’s financial health. View our latest analysis for ENGlobal
Is ENG right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ENG 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. ENG delivered a negative revenue growth of -25.60%. 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 ENG pay its short-term liabilities?
Looking at ENG’s most recent US$7.62M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$29.82M, leading to a 3.91x current account ratio. However, anything about 3x may be excessive, since ENG may be leaving too much capital in low-earning investments.
As ENG’s revenues are not growing at a fast enough pace, not taking advantage of lower cost debt may not be the best strategy. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and whether the company needs financial flexibility at this point in time. I admit this is a fairly basic analysis for ENG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ENGlobal to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has ENG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. 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.