Zero-debt allows substantial financial flexibility, especially for small-cap companies like Astrotech Corporation (NASDAQ:ASTC), 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.
Does ASTC’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either ASTC does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. Opposite to the high growth we were expecting, ASTC’s negative revenue growth of -96.3% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does ASTC’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Astrotech 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 ASTC’s most recent US$960.0k liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$4.3m, leading to a 4.45x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue ASTC is leaving too much capital in low-earning investments.
As a high-growth company, it may be beneficial for ASTC 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 be different. Keep in mind I haven’t considered other factors such as how ASTC has been performing in the past. I suggest you continue to research Astrotech to get a better picture of the stock by looking at:
- Historical Performance: What has ASTC’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.
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