What does BSQUARE Corporation's (NASDAQ:BSQR) Balance Sheet Tell Us About Its Future?

The direct benefit for BSQUARE Corporation (NASDAQ:BSQR), 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 BSQR 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 BSQR has outstanding financial strength. I recommend you look at the following hurdles to assess BSQR’s financial health. See our latest analysis for BSQUARE

Does BSQR's growth rate justify its decision for financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. The lack of debt on BSQR’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 BSQR is a high-growth company. Opposite to the high growth we were expecting, BSQR’s negative revenue growth of -17.08% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can BSQR pay its short-term liabilities?

Since BSQUARE 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. At the current liabilities level of US$15.29m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.61x. Generally, for Software companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

BSQR is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I'm sure BSQR has company-specific issues impacting its capital structure decisions. I recommend you continue to research BSQUARE to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for BSQR’s future growth? Take a look at our free research report of analyst consensus for BSQR’s outlook.
2. Historical Performance: What has BSQR'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.
3. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.