Zero-debt allows substantial financial flexibility, especially for small-cap companies like Imperva Inc (NASDAQ:IMPV), 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 IMPV has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Imperva
Is financial flexibility worth the 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. Either IMPV 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 revenue growth in the teens is not considered high-growth. IMPV’s revenue growth of 12.87% falls into this range. More capital can help the business grow faster. If IMPV is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can IMPV pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Imperva has no solvency issues, which is 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$138.09M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.41x. Usually, for Software companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
As IMPV’s revenues are not growing at a fast enough pace, not taking advantage of lower cost debt may not be the best strategy. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how IMPV has been performing in the past. I suggest you continue to research Imperva to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for IMPV’s future growth? Take a look at our free research report of analyst consensus for IMPV’s outlook.
- 2. Valuation: What is IMPV 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 IMPV is currently mispriced by the market.
- 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.