Zero-debt allows substantial financial flexibility, especially for small-cap companies like 8×8 Inc (NYSE:EGHT), 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. While EGHT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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.
Check out our latest analysis for 8×8
Is EGHT right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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 EGHT’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 EGHT is a high-growth company. EGHT’s revenue growth in the teens of 18% is not considered as high-growth, especially 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 EGHT meet its short-term obligations with the cash in hand?
Since 8×8 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. With current liabilities at US$61m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.06x. However, a ratio greater than 3x may be considered as quite high.
Next Steps:
As a high-growth company, it may be beneficial for EGHT to have some financial flexibility, hence zero-debt. Since there is also no concerns around EGHT’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how EGHT has been performing in the past. I recommend you continue to research 8×8 to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EGHT’s future growth? Take a look at our free research report of analyst consensus for EGHT’s outlook.
- Historical Performance: What has EGHT’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.
- 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 editorial-team@simplywallst.com.