Zero-debt allows substantial financial flexibility, especially for small-cap companies like the Rubicon Project Inc (NYSE:RUBI), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? 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.
Is RUBI 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. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on RUBI’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 RUBI is a high-growth company. RUBI delivered a negative revenue growth of -47.2%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does RUBI’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Rubicon Project 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. Looking at RUBI’s most recent US$201.4m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$266.5m, leading to a 1.32x current account ratio. Generally, for Software companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
RUBI is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how RUBI has been performing in the past. I suggest you continue to research Rubicon Project to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RUBI’s future growth? Take a look at our free research report of analyst consensus for RUBI’s outlook.
- Historical Performance: What has RUBI’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 email@example.com.