The direct benefit for Checkpoint Therapeutics, Inc. (NASDAQ:CKPT), 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 CKPT will have to adhere to stricter debt covenants and have less financial flexibility. While CKPT 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.
Is CKPT growing fast enough to value 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. CKPT’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. CKPT delivered a negative revenue growth of -57%. 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 CKPT’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Checkpoint Therapeutics 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. At the current liabilities level of US$8.8m, it appears that the company has been able to meet these commitments with a current assets level of US$31m, leading to a 3.51x current account ratio. However, many consider a ratio above 3x to be high.
As a high-growth company, it may be beneficial for CKPT to have some financial flexibility, hence zero-debt. Since there is also no concerns around CKPT’s liquidity needs, this may be its optimal capital structure for the time being. In the future, CKPT’s financial situation may change. I admit this is a fairly basic analysis for CKPT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Checkpoint Therapeutics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CKPT’s future growth? Take a look at our free research report of analyst consensus for CKPT’s outlook.
- Historical Performance: What has CKPT’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.
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