Clarkson PLC (LON:CKN), 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 CKN 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 go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Is CKN right in choosing 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. Either CKN 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. A single-digit revenue growth of 1.3% for CKN is considerably low for a small-cap company. 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 CKN pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Clarkson 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. At the current liabilities level of UK£100m liabilities, the company has been able to meet these commitments with a current assets level of UK£186m, leading to a 1.85x current account ratio. For Shipping companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
As a high-growth company, it may be beneficial for CKN to have some financial flexibility, hence zero-debt. Since there is also no concerns around CKN’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, CKN’s financial situation may change. Keep in mind I haven’t considered other factors such as how CKN has been performing in the past. I suggest you continue to research Clarkson to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CKN’s future growth? Take a look at our free research report of analyst consensus for CKN’s outlook.
- Valuation: What is CKN 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 CKN 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.