Why RealNetworks Inc (NASDAQ:RNWK) Is A Financially Healthy Company

The direct benefit for RealNetworks Inc (NASDAQ:RNWK), 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 RNWK 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 RNWK 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. View our latest analysis for RealNetworks

Is RNWK right in choosing 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 RNWK’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 RNWK is a high-growth company. Opposite to the high growth we were expecting, RNWK’s negative revenue growth of -3.85% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can RNWK pay its short-term liabilities?

Given zero long-term debt on its balance sheet, RealNetworks has no solvency issues, which is 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. Looking at RNWK’s most recent US$38.58M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$104.88M, leading to a 2.72x current account ratio. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Next Steps:

Since RNWK is a low-growth stock in terms of its revenues, not taking advantage of lower cost debt may not be the best strategy. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for RNWK's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research RealNetworks to get a better picture of the stock by looking at:

• 1. Historical Performance: What has RNWK'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.
• 2. 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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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.