Instructure Inc (NYSE:INST), 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 INST will have to follow strict debt obligations which will reduce its financial flexibility. While INST has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess INST’s financial health.
Does INST’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 INST’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 INST is a high-growth company. A double-digit revenue growth of 36.5% is considered relatively high for a small-cap company like INST. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can INST meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Instructure 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. At the current liabilities level of US$149.6m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$230.5m, leading to a 1.54x current account ratio. Usually, for Internet companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Having no debt on the books means INST has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around INST’s liquidity needs, this may be its optimal capital structure for the time being. In the future, INST’s financial situation may change. This is only a rough assessment of financial health, and I’m sure INST has company-specific issues impacting its capital structure decisions. You should continue to research Instructure to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for INST’s future growth? Take a look at our free research report of analyst consensus for INST’s outlook.
- Valuation: What is INST 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 INST 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.