The direct benefit for Sesen Bio Inc (NASDAQ:SESN), 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 SESN will have to adhere to stricter debt covenants and have less financial flexibility. While SESN 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 SESN growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on SESN’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if SESN is a high-growth company. SESN delivered a negative revenue growth of -100%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can SESN meet its short-term obligations with the cash in hand?
Since Sesen Bio 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. At the current liabilities level of US$6.6m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 9.05x. Having said that, a ratio greater than 3x may be considered as quite high.
SESN is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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, SESN’s financial situation may change. I admit this is a fairly basic analysis for SESN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sesen Bio to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SESN’s future growth? Take a look at our free research report of analyst consensus for SESN’s outlook.
- Historical Performance: What has SESN’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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