Alder Biopharmaceuticals Inc (NASDAQ:ALDR), 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 ALDR 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 ALDR has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. See our latest analysis for Alder Biopharmaceuticals
Does ALDR’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ALDR 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.
Can ALDR pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Alder Biopharmaceuticals has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at ALDR’s most recent $25.9M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $393.2M, with a current ratio of 15.19x. Though, anything about 3x may be excessive, since ALDR may be leaving too much capital in low-earning investments.
Having no debt on the books means ALDR 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. Going forward, its financial position may change. I admit this is a fairly basic analysis for ALDR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Alder Biopharmaceuticals to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for ALDR’s future growth? Take a look at our free research report of analyst consensus for ALDR’s outlook.
2. Valuation: What is ALDR 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 ALDR is currently mispriced by the market.
3. 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.