Xencor, Inc. (NASDAQ:XNCR), 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 XNCR will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean XNCR has outstanding financial strength. I recommend you look at the following hurdles to assess XNCR’s financial health.
Check out our latest analysis for Xencor
Is XNCR 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. Either XNCR 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. XNCR 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 XNCR meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Xencor 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. Looking at XNCR’s US$52m in current 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 5.51x. However, a ratio greater than 3x may be considered high by some.
Next Steps:
Having no debt on the books means XNCR 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, XNCR’s financial situation may change. Keep in mind I haven’t considered other factors such as how XNCR has been performing in the past. You should continue to research Xencor to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for XNCR’s future growth? Take a look at our free research report of analyst consensus for XNCR’s outlook.
- Valuation: What is XNCR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether XNCR is currently mispriced by the market.
- 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.
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 editorial-team@simplywallst.com.