The direct benefit for BMTC Group Inc (TSX:GBT), 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 GBT will have to adhere to stricter debt covenants and have less financial flexibility. While GBT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. 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. Check out our latest analysis for BMTC Group
Does GBT’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. GBT’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. A single-digit revenue growth of 4.09% for GBT is considerably low for a small-cap company. More capital can help the business grow faster. If GBT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can GBT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, BMTC Group 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. At the current liabilities level of CA$106.3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$120.0M, with a current ratio of 1.13x. Generally, for specialty retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Are you a shareholder? GBT’s soft top-line growth means not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for GBT, and why financial flexibility is needed at this stage in its business cycle. I suggest you take a look into a future growth analysis to properly assess what the market expects for the company moving forward.
Are you a potential investor? In terms of meeting is short term obligations, there’s nothing to worry about for GBT. But, its low sales growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure GBT has company-specific issues impacting its capital structure decisions. You should continue your analysis by taking a look at GBT’s past performance to conclude on GBT’s financial health.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.