Applied Genetic Technologies Corporation (NASDAQ:AGTC): Time For A Financial Health Check
The direct benefit for Applied Genetic Technologies Corporation (NASDAQ:AGTC), 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 AGTC will have to adhere to stricter debt covenants and have less financial flexibility. 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 AGTC’s financial health.
View our latest analysis for Applied Genetic Technologies
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. AGTC’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. Opposite to the high growth we were expecting, AGTC’s negative revenue growth of -27% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does AGTC’s liquid assets cover its short-term commitments?
Since Applied Genetic Technologies 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. At the current liabilities level of US$25m, it seems that the business has been able to meet these obligations given the level of current assets of US$108m, with a current ratio of 4.32x. Having said that, a ratio above 3x may be considered excessive by some investors.
Next Steps:
As a high-growth company, it may be beneficial for AGTC to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may change. I admit this is a fairly basic analysis for AGTC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Applied Genetic Technologies to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AGTC’s future growth? Take a look at our free research report of analyst consensus for AGTC’s outlook.
Historical Performance: What has AGTC’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.
