Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE), 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 ZYNE will have to follow strict debt obligations which will reduce its financial flexibility. While ZYNE has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ZYNE’s financial health.
See our latest analysis for Zynerba Pharmaceuticals
Is ZYNE right in choosing 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 ZYNE’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 ZYNE is a high-growth company.
Does ZYNE’s liquid assets cover its short-term commitments?
Since Zynerba Pharmaceuticals 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$11.3m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.34x. Though, anything above 3x is considered high and could mean that ZYNE has too much idle capital in low-earning investments.
Next Steps:
Having no debt on the books means ZYNE 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, its financial position may change. This is only a rough assessment of financial health, and I'm sure ZYNE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Zynerba Pharmaceuticals to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZYNE’s future growth? Take a look at our free research report of analyst consensus for ZYNE’s outlook.
- Valuation: What is ZYNE 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 ZYNE 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.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.