The direct benefit for Bridgford Foods Corporation (NASDAQ:BRID), 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 BRID will have to adhere to stricter debt covenants and have less financial flexibility. 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 BRID’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. 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. BRID’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 revenue growth in the teens is not considered high-growth. BRID’s revenue growth of 13.2% falls into this range. 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 BRID meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Bridgford Foods 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. With current liabilities at US$18.6m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.01x. However, anything about 3x may be excessive, since BRID may be leaving too much capital in low-earning investments.
As a high-growth company, it may be beneficial for BRID to have some financial flexibility, hence zero-debt. Since there is also no concerns around BRID’s liquidity needs, this may be its optimal capital structure for the time being. In the future, BRID’s financial situation may change. This is only a rough assessment of financial health, and I’m sure BRID has company-specific issues impacting its capital structure decisions. I suggest you continue to research Bridgford Foods to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BRID’s future growth? Take a look at our free research report of analyst consensus for BRID’s outlook.
- Historical Performance: What has BRID’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.
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.
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