Zero-debt allows substantial financial flexibility, especially for small-cap companies like Allot Ltd (NASDAQ:ALLT), 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 recommend you look at the following hurdles to assess ALLT’s financial health.
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. ALLT’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. ALLT’s revenue growth in the teens of 12% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If ALLT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can ALLT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Allot 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. Looking at ALLT’s US$44m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$147m, leading to a 3.35x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors.
ALLT 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 ALLT’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how ALLT has been performing in the past. I recommend you continue to research Allot to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALLT’s future growth? Take a look at our free research report of analyst consensus for ALLT’s outlook.
- Valuation: What is ALLT 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 ALLT 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 firstname.lastname@example.org.