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LeMaitre Vascular, Inc. (NASDAQ:LMAT), 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 LMAT 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 LMAT has outstanding 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.
Check out our latest analysis for LeMaitre Vascular
Is LMAT growing fast enough to value 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. Either LMAT 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. LMAT’s revenue growth over the past year is a single-digit 5.4% which is relatively low for a small-cap company. More capital can help the business grow faster. If LMAT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can LMAT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, LeMaitre Vascular 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. At the current liabilities level of US$15m, it seems that the business has been able to meet these obligations given the level of current assets of US$87m, with a current ratio of 5.93x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Next Steps:
Having no debt on the books means LMAT has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, LMAT’s financial situation may change. This is only a rough assessment of financial health, and I’m sure LMAT has company-specific issues impacting its capital structure decisions. I recommend you continue to research LeMaitre Vascular to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LMAT’s future growth? Take a look at our free research report of analyst consensus for LMAT’s outlook.
- Valuation: What is LMAT 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 LMAT 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 editorial-team@simplywallst.com.