The direct benefit for NIC Inc. (NASDAQ:EGOV), 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 EGOV 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 EGOV 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.
Does EGOV’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either EGOV 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. A single-digit revenue growth of 5.5% for EGOV is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can EGOV meet its short-term obligations with the cash in hand?
Since NIC 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$103m, the company has been able to meet these obligations given the level of current assets of US$294m, with a current ratio of 2.85x. Generally, for IT companies, this is a reasonable 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 EGOV has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around EGOV’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, EGOV’s financial situation may change. I admit this is a fairly basic analysis for EGOV’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NIC to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EGOV’s future growth? Take a look at our free research report of analyst consensus for EGOV’s outlook.
- Valuation: What is EGOV 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 EGOV 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 email@example.com.