Catalyst Biosciences, Inc. (NASDAQ:CBIO), 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 CBIO will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CBIO has outstanding 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 CBIO growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either CBIO 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. CBIO delivered a negative revenue growth of -58%. 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.
Can CBIO meet its short-term obligations with the cash in hand?
Since Catalyst Biosciences doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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$3.3m, it seems that the business has been able to meet these obligations given the level of current assets of US$133m, with a current ratio of 40.2x. However, many consider a ratio above 3x to be high.
Having no debt on the books means CBIO 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. Moving forward, its financial position may change. I admit this is a fairly basic analysis for CBIO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Catalyst Biosciences to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CBIO’s future growth? Take a look at our free research report of analyst consensus for CBIO’s outlook.
- Valuation: What is CBIO 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 CBIO 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.