Applied Genetic Technologies Corporation (NASDAQ:AGTC), 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 AGTC 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 AGTC has outstanding financial strength. I recommend you look at the following hurdles to assess AGTC’s financial health.
See our latest analysis for Applied Genetic Technologies
Is AGTC 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. 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 AGTC 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. AGTC delivered a negative revenue growth of -27%. 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.
Does AGTC’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Applied Genetic Technologies 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. With current liabilities at US$25m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.32x. Having said that, a ratio greater than 3x may be considered as quite high.
Next Steps:
Having no debt on the books means AGTC has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around AGTC’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for AGTC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Applied Genetic Technologies to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGTC’s future growth? Take a look at our free research report of analyst consensus for AGTC’s outlook.
- Historical Performance: What has AGTC’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 editorial-team@simplywallst.com.