The direct benefit for ChemoCentryx Inc (NASDAQ:CCXI), 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 CCXI 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 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 ChemoCentryx
Is financial flexibility worth the 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. CCXI’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.
Can CCXI meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, ChemoCentryx 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 CCXI’s most recent $38.3M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $148.7M, leading to a 3.88x current account ratio. However, anything about 3x may be excessive, since CCXI may be leaving too much capital in low-earning investments.
Are you a shareholder? As a high-growth company, it may be beneficial for CCXI to have some financial flexibility, hence zero-debt. 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, its financial position may be different. You should always be keeping abreast of market expectations for CCXI’s future growth.
Are you a potential investor? CCXI’s high growth makes financial flexibility an attractive option. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to further analyse CCXI’s track record. You should continue your analysis by taking a look at CCXI’s past performance to figure out CCXI’s financial health position.