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What does Encore Wire Corporation’s (NASDAQ:WIRE) Balance Sheet Tell Us About Its Future?

Alexis Guardo

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Encore Wire Corporation (NASDAQ:WIRE), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. 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 take you through a few basic checks to assess the financial health of companies with no debt.

Check out our latest analysis for Encore Wire

Does WIRE’s growth rate justify its decision for financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. 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 WIRE’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 WIRE is a high-growth company. WIRE’s revenue growth in the teens of 15% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If WIRE is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.

NASDAQGS:WIRE Historical Debt January 28th 19
NASDAQGS:WIRE Historical Debt January 28th 19

Can WIRE pay its short-term liabilities?

Since Encore Wire 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. Looking at WIRE’s US$82m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$503m, with a current ratio of 6.17x. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

Next Steps:

As a high-growth company, it may be beneficial for WIRE to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, WIRE’s financial situation may change. Keep in mind I haven’t considered other factors such as how WIRE has been performing in the past. I suggest you continue to research Encore Wire to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WIRE’s future growth? Take a look at our free research report of analyst consensus for WIRE’s outlook.

  2. Valuation: What is WIRE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WIRE is currently mispriced by the market.

  3. 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.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.