CSS Industries Inc (NYSE:CSS), 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 CSS will have to follow strict debt obligations which will reduce its financial flexibility. While CSS 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. See our latest analysis for CSS
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 CSS 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 2.30% for CSS is considerably low for a small-cap company. More capital can help the business grow faster. If CSS is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does CSS’s liquid assets cover its short-term commitments?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, CSS may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that CSS does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Are you a shareholder? CSS’s soft top-line growth means 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 suggest you take a look into a future growth analysis to examine what the market expects for the company moving forward.
Are you a potential investor? CSS’s management of short term liabilities is strong. 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 CSS has been performing in the past. You should continue your analysis by taking a look at CSS’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.