Zero-debt allows substantial financial flexibility, especially for small-cap companies like eXp World Holdings, Inc. (NASDAQ:EXPI), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean EXPI has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is EXPI growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 EXPI’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 EXPI is a high-growth company. EXPI’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.
Can EXPI meet its short-term obligations with the cash in hand?
Since eXp World Holdings 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$25m, it appears that the company has been able to meet these obligations given the level of current assets of US$47m, with a current ratio of 1.84x. Usually, for Real Estate companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means EXPI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around EXPI’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure EXPI has company-specific issues impacting its capital structure decisions. I suggest you continue to research eXp World Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EXPI’s future growth? Take a look at our free research report of analyst consensus for EXPI’s outlook.
- Valuation: What is EXPI 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 EXPI 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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