Is Advanced Emissions Solutions Inc’s (NASDAQ:ADES) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for Advanced Emissions Solutions Inc (NASDAQ:ADES), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ADES will have to adhere to stricter debt covenants and have less financial flexibility. While ADES 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 ADES’s financial health.
See our latest analysis for Advanced Emissions Solutions
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ADES 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. Opposite to the high growth we were expecting, ADES’s negative revenue growth of -86.8% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ADES meet its short-term obligations with the cash in hand?
Since Advanced Emissions Solutions 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. With current liabilities at US$4.0m, it appears that the company has been able to meet these obligations given the level of current assets of US$39.0m, with a current ratio of 9.85x. Though, anything above 3x is considered high and could mean that ADES has too much idle capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for ADES to have some financial flexibility, hence zero-debt. Since there is also no concerns around ADES’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for ADES’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Advanced Emissions Solutions to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ADES’s future growth? Take a look at our free research report of analyst consensus for ADES’s outlook.
Historical Performance: What has ADES’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 editorial-team@simplywallst.com.
