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The direct benefit for Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP), 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 CRBP will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CRBP has outstanding financial strength. I recommend you look at the following hurdles to assess CRBP’s financial health.
Is CRBP right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 CRBP 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. A single-digit revenue growth of 2.8% for CRBP is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can CRBP meet its short-term obligations with the cash in hand?
Since Corbus Pharmaceuticals Holdings doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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. With current liabilities at US$17m, the company has been able to meet these commitments with a current assets level of US$58m, leading to a 3.45x current account ratio. Having said that, many consider a ratio above 3x to be high.
As a high-growth company, it may be beneficial for CRBP to have some financial flexibility, hence zero-debt. Since there is also no concerns around CRBP’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, CRBP’s financial situation may change. I admit this is a fairly basic analysis for CRBP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Corbus Pharmaceuticals Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRBP’s future growth? Take a look at our free research report of analyst consensus for CRBP’s outlook.
- Valuation: What is CRBP 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 CRBP is currently mispriced by the market.
- 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 firstname.lastname@example.org.