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The direct benefit for Reliv’ International, Inc. (NASDAQ:RELV), 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 RELV will have to adhere to stricter debt covenants and have less financial flexibility. While RELV 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 RELV 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. RELV’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. RELV delivered a negative revenue growth of -14%. 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 RELV pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Reliv’ International 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 RELV’s US$4.2m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$7.9m, with a current ratio of 1.87x. Usually, for Personal Products companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means RELV has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around RELV’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure RELV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Reliv’ International to get a better picture of the stock by looking at:
- Valuation: What is RELV 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 RELV is currently mispriced by the market.
- Historical Performance: What has RELV’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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.