The direct benefit for AppFolio, Inc. (NASDAQ:APPF), 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 APPF will have to adhere to stricter debt covenants and have less financial flexibility. While APPF has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. 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.
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Is APPF growing fast enough to value financial flexibility over 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. APPF’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. A double-digit revenue growth of 33% is considered relatively high for a small-cap company like APPF. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does APPF’s liquid assets cover its short-term commitments?
Since AppFolio 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. Looking at APPF’s US$21m in current liabilities, the company has been able to meet these commitments with a current assets level of US$62m, leading to a 2.98x current account ratio. For Software companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means APPF has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around APPF’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, APPF’s financial situation may change. This is only a rough assessment of financial health, and I’m sure APPF has company-specific issues impacting its capital structure decisions. I recommend you continue to research AppFolio to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APPF’s future growth? Take a look at our free research report of analyst consensus for APPF’s outlook.
- Valuation: What is APPF 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 APPF 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.