The direct benefit for Bio-Path Holdings Inc (NASDAQ:BPTH), 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 BPTH will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess BPTH’s financial health.
Does BPTH’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either BPTH 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. BPTH’s revenue growth over the past year was an impressively high triple-digit rate, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can BPTH pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Bio-Path Holdings 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$957k, it appears that the company has been able to meet these commitments with a current assets level of US$2.8m, leading to a 2.95x current account ratio. Generally, for Pharmaceuticals companies, this is a reasonable 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 BPTH 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. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure BPTH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Bio-Path Holdings to get a more holistic view of the stock by looking at:
- Historical Performance: What has BPTH’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.
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