Qualstar Corporation (NASDAQ:QBAK), 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 QBAK will have to follow strict debt obligations which will reduce its financial flexibility. While QBAK has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
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Is QBAK growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either QBAK 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. QBAK’s revenue growth over the past year is a double-digit 29% which is considerably high for a small-cap company. 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 QBAK pay its short-term liabilities?
Since Qualstar 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$2.6m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.84x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
As a high-growth company, it may be beneficial for QBAK to have some financial flexibility, hence zero-debt. Since there is also no concerns around QBAK’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for QBAK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Qualstar to get a more holistic view of the stock by looking at:
- Historical Performance: What has QBAK’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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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 email@example.com.