The direct benefit for Intellia Therapeutics Inc (NASDAQ:NTLA), 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 NTLA will have to adhere to stricter debt covenants and have less financial flexibility. While NTLA has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is NTLA growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 NTLA 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. NTLA’s revenue growth over the past year is a double-digit 29% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can NTLA meet its short-term obligations with the cash in hand?
Since Intellia Therapeutics 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. 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. At the current liabilities level of US$25m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$318m, leading to a 12.62x current account ratio. However, many consider anything above 3x to be quite high and could mean that NTLA has too much idle capital in low-earning investments.
Having no debt on the books means NTLA 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, NTLA’s financial situation may change. This is only a rough assessment of financial health, and I’m sure NTLA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Intellia Therapeutics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NTLA’s future growth? Take a look at our free research report of analyst consensus for NTLA’s outlook.
- Historical Performance: What has NTLA’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.
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