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The direct benefit for CHF Solutions, Inc. (NASDAQ:CHFS), 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 CHFS will have to adhere to stricter debt covenants and have less financial flexibility. While CHFS has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. 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.
Is CHFS growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 CHFS 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. A double-digit revenue growth of 25% is considered relatively high for a small-cap company like CHFS. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does CHFS’s liquid assets cover its short-term commitments?
Since CHF Solutions 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. With current liabilities at US$2.0m, the company has been able to meet these commitments with a current assets level of US$11m, leading to a 5.57x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors.
CHFS 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. Going forward, CHFS’s financial situation may change. I admit this is a fairly basic analysis for CHFS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CHF Solutions to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CHFS’s future growth? Take a look at our free research report of analyst consensus for CHFS’s outlook.
- Historical Performance: What has CHFS’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.
- 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.