Limelight Networks, Inc. (NASDAQ:LLNW), 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 LLNW will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean LLNW has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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. LLNW’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A revenue growth in the teens is not considered high-growth. LLNW’s revenue growth of 11% falls into this range. 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 LLNW pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Limelight Networks 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$37m, the company has been able to meet these obligations given the level of current assets of US$97m, with a current ratio of 2.6x. 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 LLNW has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around LLNW’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how LLNW has been performing in the past. You should continue to research Limelight Networks to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LLNW’s future growth? Take a look at our free research report of analyst consensus for LLNW’s outlook.
- Valuation: What is LLNW 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 LLNW 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.