FARO Technologies, Inc. (NASDAQ:FARO), 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 FARO will have to follow strict debt obligations which will reduce its financial flexibility. While FARO 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 FARO’s financial health.
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Is FARO growing fast enough to value 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 FARO’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 FARO is a high-growth company. A revenue growth in the teens is not considered high-growth. FARO’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 FARO’s liquid assets cover its short-term commitments?
Since FARO Technologies 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. 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 FARO’s US$80m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$295m, with a current ratio of 3.71x. However, many consider a ratio above 3x to be high.
Having no debt on the books means FARO has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around FARO’s liquidity needs, this may be its optimal capital structure for the time being. In the future, FARO’s financial situation may change. Keep in mind I haven’t considered other factors such as how FARO has been performing in the past. You should continue to research FARO Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FARO’s future growth? Take a look at our free research report of analyst consensus for FARO’s outlook.
- Valuation: What is FARO 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 FARO 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.