Is Camtek Ltd (NASDAQ:CAMT) A Financially Sound Company?
The direct benefit for Camtek Ltd (NASDAQ:CAMT), 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 CAMT will have to adhere to stricter debt covenants and have less financial flexibility. While CAMT 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.
View our latest analysis for Camtek
Is CAMT growing fast enough to value 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 CAMT 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. CAMT delivered a negative revenue growth of -8.0%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does CAMT’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Camtek 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. Looking at CAMT’s most recent US$31.7m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$99.9m, with a current ratio of 3.15x. However, a ratio greater than 3x may be considered as too high, as CAMT could be holding too much capital in a low-return investment environment.
Next Steps:
As a high-growth company, it may be beneficial for CAMT to have some financial flexibility, hence zero-debt. 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 change. I admit this is a fairly basic analysis for CAMT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Camtek to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CAMT’s future growth? Take a look at our free research report of analyst consensus for CAMT’s outlook.
Valuation: What is CAMT 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 CAMT 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 editorial-team@simplywallst.com.
