Cleveland BioLabs Inc (NASDAQ:CBLI), 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 CBLI 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 CBLI has outstanding financial strength. 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. See our latest analysis for Cleveland BioLabs
Is CBLI right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either CBLI 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. CBLI’s revenue growth over the past year is a double-digit 29.92% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can CBLI meet its short-term obligations with the cash in hand?
Since Cleveland BioLabs 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. At the current liabilities level of $3.1M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $15.9M, leading to a 5.11x current account ratio. Though, anything about 3x may be excessive, since CBLI may be leaving too much capital in low-earning investments.
Are you a shareholder? Given that Cleveland BioLabs is a relatively low-growth company, not having any low-cost debt funding may not be optimal for the business. 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 the company’s position.
Are you a potential investor? CBLI’s financial health in terms of its liquidity shouldn’t be a concern for potential investors. But, a relatively low revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. Keep in mind I haven’t considered other factors such as how CBLI has been performing in the past. I encourage you to continue your research by taking a look at CBLI’s past performance in order to determine for yourself whether its zero-debt position is justified.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.