Zero-debt allows substantial financial flexibility, especially for small-cap companies like Atrion Corporation (NASDAQ:ATRI), 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 ATRI 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 ATRI’s financial health.
Does ATRI’s growth rate justify its decision for 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. ATRI’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. ATRI’s revenue growth over the past year is a single-digit 4.0% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can ATRI pay its short-term liabilities?
Since Atrion 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. With current liabilities at US$10m, it appears that the company has been able to meet these obligations given the level of current assets of US$122m, with a current ratio of 11.96x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Having no debt on the books means ATRI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ATRI’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, ATRI’s financial situation may change. Keep in mind I haven’t considered other factors such as how ATRI has been performing in the past. I recommend you continue to research Atrion to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATRI’s future growth? Take a look at our free research report of analyst consensus for ATRI’s outlook.
- Valuation: What is ATRI 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 ATRI 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.
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