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Is Advanced Medical Solutions Group plc’s (LON:AMS) Liquidity As Good As Its Solvency?

Sean Barnes

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Advanced Medical Solutions Group plc (AIM:AMS), 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 AMS 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 AMS’s financial health. See our latest analysis for Advanced Medical Solutions Group

Does AMS’s growth rate justify its decision for 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 AMS’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 AMS is a high-growth company. AMS’s revenue growth over the past year is a double-digit 20.45% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.

AIM:AMS Historical Debt Mar 1st 18

Does AMS’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Advanced Medical Solutions Group has no solvency issues, which is 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. With current liabilities at UK£15.04M, it seems that the business has been able to meet these commitments with a current assets level of UK£74.87M, leading to a 4.98x current account ratio. However, anything above 3x is considered high and could mean that AMS has too much idle capital in low-earning investments.

Next Steps:

As AMS’s revenues are not growing at a fast enough pace, being in a zero-debt position isn’t always optimal. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. This is only a rough assessment of financial health, and I’m sure AMS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Advanced Medical Solutions Group to get a more holistic view of the stock by looking at:

To help readers see pass 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.