Control4 Corporation (NASDAQ:CTRL), 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 CTRL will have to follow strict debt obligations which will reduce its financial flexibility. While CTRL 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 CTRL’s financial health.
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Is CTRL growing fast enough to value 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 CTRL’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 CTRL is a high-growth company. A revenue growth in the teens is not considered high-growth. CTRL’s revenue growth of 15% 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.
Does CTRL’s liquid assets cover its short-term commitments?
Since Control4 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. Looking at CTRL’s US$40m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$171m, with a current ratio of 4.22x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
As a high-growth company, it may be beneficial for CTRL to have some financial flexibility, hence zero-debt. Since there is also no concerns around CTRL’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure CTRL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Control4 to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CTRL’s future growth? Take a look at our free research report of analyst consensus for CTRL’s outlook.
- Valuation: What is CTRL 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 CTRL 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 firstname.lastname@example.org.