The direct benefit for CorVel Corporation (NASDAQ:CRVL), 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 CRVL 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 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 CorVel
Is CRVL right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on CRVL’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 CRVL is a high-growth company. CRVL’s revenue growth over the past year is a single-digit 3.00% which is relatively low for a small-cap company. More capital can help the business grow faster. If CRVL is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can CRVL meet its short-term obligations with the cash in hand?
Since CorVel 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. With current liabilities at $90.1M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $128.9M, leading to a 1.43x current account ratio. Usually, for healthcare companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Are you a shareholder? Since CRVL is a low-growth stock in terms of its revenues, being in a zero-debt position isn’t always optimal. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. I recommend taking a look into a future growth analysis to account for what the market expects for the company moving forward.
Are you a potential investor? CRVL’s management of short term liabilities is strong. Though, its low sales 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 CRVL has been performing in the past. For your next step, you should take a look at CRVL’s past performance to figure out CRVL’s financial health position.
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.