Zero-debt allows substantial financial flexibility, especially for small-cap companies like Taitron Components Incorporated (NASDAQ:TAIT), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean TAIT has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is TAIT right in choosing 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. Either TAIT does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A single-digit revenue growth of 3.2% for TAIT is considerably low 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 TAIT meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Taitron Components 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. With current liabilities at US$1m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.28x. However, anything above 3x may be considered excessive by some investors. They might argue TAIT is leaving too much capital in low-earning investments.
As a high-growth company, it may be beneficial for TAIT to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how TAIT has been performing in the past. I suggest you continue to research Taitron Components to get a better picture of the stock by looking at:
- Valuation: What is TAIT 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 TAIT is currently mispriced by the market.
- Historical Performance: What has TAIT’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 firstname.lastname@example.org.