The direct benefit for Bio-Path Holdings Inc (NASDAQ:BPTH), 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 BPTH will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BPTH has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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. 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 BPTH’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 BPTH is a high-growth company. BPTH delivered a strikingly high triple-digit revenue growth over the past year, 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 BPTH meet its short-term obligations with the cash in hand?
Since Bio-Path Holdings 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 US$1m, it appears that the company has been able to meet these commitments with a current assets level of US$5m, leading to a 4.49x current account ratio. Having said that, anything above 3x may be considered excessive by some investors. They might argue BPTH is leaving too much capital in low-earning investments.
Having no debt on the books means BPTH has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around BPTH’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure BPTH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Bio-Path Holdings to get a better picture of the stock by looking at:
- Historical Performance: What has BPTH’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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