Surface Oncology Inc (NASDAQ:SURF), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is SURF will have to follow strict debt obligations which will reduce its financial flexibility. While SURF 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. See our latest analysis for Surface Oncology
Is financial flexibility worth the 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 SURF’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 SURF is a high-growth company. SURF delivered a strikingly high triple-digit revenue growth over the past year, 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 SURF meet its short-term obligations with the cash in hand?
Since Surface Oncology 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. With current liabilities at US$24.18m, the company has been able to meet these obligations given the level of current assets of US$101.23m, with a current ratio of 4.19x. However, a ratio greater than 3x may be considered as too high, as SURF could be holding too much capital in a low-return investment environment.
Having no debt on the books means SURF has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around SURF’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I admit this is a fairly basic analysis for SURF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Surface Oncology to get a better picture of the stock by looking at:
- Historical Performance: What has SURF’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.