Zero-debt allows substantial financial flexibility, especially for small-cap companies like Yield10 Bioscience Inc (NASDAQ:YTEN), 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 YTEN 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 YTEN’s financial health.
Is YTEN right in choosing 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. Either YTEN 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. Opposite to the high growth we were expecting, YTEN’s negative revenue growth of -56% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can YTEN pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Yield10 Bioscience 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$1.8m, it appears that the company has been able to meet these commitments with a current assets level of US$8.3m, leading to a 4.57x current account ratio. However, a ratio greater than 3x may be considered high by some.
As a high-growth company, it may be beneficial for YTEN 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, its financial position may change. I admit this is a fairly basic analysis for YTEN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Yield10 Bioscience to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for YTEN’s future growth? Take a look at our free research report of analyst consensus for YTEN’s outlook.
- Historical Performance: What has YTEN’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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