Zero-debt allows substantial financial flexibility, especially for small-cap companies like BioSpecifics Technologies Corp. (NASDAQ:BSTC), 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 BSTC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Is BSTC right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either BSTC 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. A single-digit revenue growth of 8.9% for BSTC is considerably low for a small-cap company. More capital can help the business grow faster. If BSTC is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can BSTC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, BioSpecifics Technologies has no solvency issues, which is 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. Looking at BSTC’s US$1.8m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$88m, leading to a 48.42x current account ratio. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
As a high-growth company, it may be beneficial for BSTC to have some financial flexibility, hence zero-debt. Since there is also no concerns around BSTC’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, BSTC’s financial situation may change. Keep in mind I haven’t considered other factors such as how BSTC has been performing in the past. I recommend you continue to research BioSpecifics Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BSTC’s future growth? Take a look at our free research report of analyst consensus for BSTC’s outlook.
- Valuation: What is BSTC 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 BSTC 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 email@example.com.