Zero-debt allows substantial financial flexibility, especially for small-cap companies like Advaxis Inc (NASDAQ:ADXS), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for Advaxis
Is ADXS growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. ADXS’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company.
Can ADXS pay its short-term liabilities?
Since Advaxis 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. With current liabilities at $27.7M liabilities, the company has been able to meet these commitments with a current assets level of $159.9M, leading to a 5.77x current account ratio. However, a ratio greater than 3x may be considered as too high, as ADXS could be holding too much capital in a low-return investment environment.
Are you a shareholder? ADXS is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around ADXS’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I recommend keeping abreast of market expectations for ADXS’s future growth.
Are you a potential investor? ADXS’s high growth makes financial flexibility an attractive option. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also examine the company’s track record. You should continue your analysis by taking a look at ADXS’s past performance to conclude on ADXS’s financial health.
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.