The direct benefit for Cyclacel Pharmaceuticals Inc (NASDAQ:CYCC), 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 CYCC will have to adhere to stricter debt covenants and have less financial flexibility. While CYCC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess CYCC’s financial health.
Does CYCC’s growth rate justify its decision for financial flexibility over 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 CYCC’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 CYCC is a high-growth company.
Can CYCC pay its short-term liabilities?
Since Cyclacel Pharmaceuticals 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. Looking at CYCC’s most recent US$4.0m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$22.7m, with a current ratio of 5.68x. However, anything about 3x may be excessive, since CYCC may be leaving too much capital in low-earning investments.
Having no debt on the books means CYCC has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, CYCC’s financial situation may change. I admit this is a fairly basic analysis for CYCC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Cyclacel Pharmaceuticals to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CYCC’s future growth? Take a look at our free research report of analyst consensus for CYCC’s outlook.
- Historical Performance: What has CYCC’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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