The direct benefit for Athersys Inc (NASDAQ:ATHX), 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 ATHX will have to adhere to stricter debt covenants and have less financial flexibility. While ATHX has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ATHX’s financial health.
Is ATHX 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ATHX 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. ATHX’s revenue growth over the past year was an impressively high triple-digit rate, 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.
Can ATHX meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Athersys 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. With current liabilities at US$14m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.56x. Having said that, anything above 3x may be considered excessive by some investors.
ATHX is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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 ATHX has been performing in the past. I suggest you continue to research Athersys to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATHX’s future growth? Take a look at our free research report of analyst consensus for ATHX’s outlook.
- Historical Performance: What has ATHX’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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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.