The direct benefit for Wave Life Sciences Ltd. (NASDAQ:WVE), 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 WVE 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 WVE has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
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Is financial flexibility worth the 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 WVE 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. WVE’s revenue growth over the past year was an impressively high triple-digit rate, 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.
Does WVE’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Wave Life Sciences has no solvency issues, which is 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$126m, it appears that the company has been able to meet these commitments with a current assets level of US$233m, leading to a 1.85x current account ratio. Usually, for Pharmaceuticals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
WVE is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around WVE’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, WVE’s financial situation may change. Keep in mind I haven’t considered other factors such as how WVE has been performing in the past. I suggest you continue to research Wave Life Sciences to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WVE’s future growth? Take a look at our free research report of analyst consensus for WVE’s outlook.
- Historical Performance: What has WVE’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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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.