Is ClearOne Inc (NASDAQ:CLRO) As Financially Strong As Its Balance Sheet Indicates?
The direct benefit for ClearOne Inc (NASDAQ:CLRO), 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 CLRO will have to adhere to stricter debt covenants and have less 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 recommend you look at the following hurdles to assess CLRO’s financial health. Check out our latest analysis for ClearOne
Does CLRO’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. The lack of debt on CLRO’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 CLRO is a high-growth company. CLRO delivered a negative revenue growth of -15.85%. 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 CLRO pay its short-term liabilities?
Since ClearOne 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. 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 $9.3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $40.1M, with a current ratio of 4.31x. Though, a ratio greater than 3x may be considered as too high, as CLRO could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? Since CLRO is a low-growth stock in terms of its revenues, not taking advantage of lower cost debt may not be the best strategy. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. I recommend taking a look into a future growth analysis to examine what the market expects for the company moving forward.
Are you a potential investor? The company’s current holding of liquid assets gives it some level of security in any case of adverse events. However, its low sales growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. Keep in mind I haven’t considered other factors such as how CLRO has been performing in the past. I encourage you to continue your research by taking a look at CLRO’s past performance in order to determine for yourself whether its zero-debt position is justified.
To help readers see pass 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.
