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The direct benefit for Atrion Corporation (NASDAQ:ATRI), 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 ATRI will have to adhere to stricter debt covenants and have less financial flexibility. While ATRI has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ATRI’s financial health.
Is ATRI right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on ATRI’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if ATRI is a high-growth company. ATRI’s revenue growth over the past year is a single-digit 3.9% which is relatively low 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 ATRI meet its short-term obligations with the cash in hand?
Since Atrion 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 ATRI’s US$12m in current liabilities, the company has been able to meet these commitments with a current assets level of US$121m, leading to a 10.1x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Having no debt on the books means ATRI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ATRI’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how ATRI has been performing in the past. I suggest you continue to research Atrion to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATRI’s future growth? Take a look at our free research report of analyst consensus for ATRI’s outlook.
- Valuation: What is ATRI 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 ATRI 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.