What does MicroVision Inc’s (NASDAQ:MVIS) Balance Sheet Tell Us About Its Future?
MicroVision Inc (NASDAQ:MVIS), 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 MVIS will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean MVIS has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for MicroVision
Does MVIS’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. MVIS’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A double-digit revenue growth of 49.6% is considered relatively high for a small-cap company like MVIS. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does MVIS’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, MicroVision has no solvency issues, which is 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. At the current liabilities level of US$23.9m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. Usually, for Electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
MVIS is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, MVIS’s financial situation may change. This is only a rough assessment of financial health, and I’m sure MVIS has company-specific issues impacting its capital structure decisions. You should continue to research MicroVision to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MVIS’s future growth? Take a look at our free research report of analyst consensus for MVIS’s outlook.
Historical Performance: What has MVIS’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.
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.
