Canterbury Park Holding Corporation (NASDAQ:CPHC), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is CPHC will have to follow strict debt obligations which will reduce its 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 take you through a few basic checks to assess the financial health of companies with no debt.
Is CPHC growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on CPHC’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if CPHC is a high-growth company. A single-digit revenue growth of 5.3% for CPHC is considerably low for a small-cap company. More capital can help the business grow faster. If CPHC is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does CPHC’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Canterbury Park Holding 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. With current liabilities at US$18m, it appears that the company has been able to meet these commitments with a current assets level of US$24m, leading to a 1.35x current account ratio. Generally, for Hospitality companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Having no debt on the books means CPHC has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. I admit this is a fairly basic analysis for CPHC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Canterbury Park Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPHC’s future growth? Take a look at our free research report of analyst consensus for CPHC’s outlook.
- Valuation: What is CPHC 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 CPHC 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 firstname.lastname@example.org.