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 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 SESN’s financial health. See our latest analysis for Sesen Bio
Does SESN’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. 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. Opposite to the high growth we were expecting, SESN’s negative revenue growth of -100.00% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can SESN pay its short-term liabilities?
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$5.25m 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 3.87x. Though, anything about 3x may be excessive, since SESN may be leaving too much capital in low-earning investments.
Having no debt on the books means SESN 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. In the future, its financial position may be different. I admit this is a fairly basic analysis for SESN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sesen Bio to get a better picture 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.