Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0786
    -0.0007 (-0.06%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2620
    -0.0002 (-0.02%)
     
  • USD/JPY

    151.3380
    -0.0340 (-0.02%)
     
  • Bitcoin USD

    69,869.27
    -528.60 (-0.75%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,369.44
    +201.37 (+0.50%)
     

Does Zero-Debt Make Creative Technology Ltd (SGX:C76) A Financially Strong Company?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Creative Technology Ltd (SGX:C76), 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 recommend you look at the following hurdles to assess C76’s financial health. See our latest analysis for Creative Technology

Is C76 right in choosing 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 C76’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 C76 is a high-growth company. C76 delivered a negative revenue growth of -17.36%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.

SGX:C76 Historical Debt Feb 3rd 18
SGX:C76 Historical Debt Feb 3rd 18

Can C76 meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, Creative Technology 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. With current liabilities at $28.8M, it seems that the business has been able to meet these commitments with a current assets level of $103.0M, leading to a 3.58x current account ratio. However, a ratio greater than 3x may be considered as too high, as C76 could be holding too much capital in a low-return investment environment.

Next Steps:

Given that Creative Technology is a relatively low-growth company, being in a zero-debt position isn’t always optimal. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. Keep in mind I haven’t considered other factors such as how C76 has been performing in the past. I suggest you continue to research Creative Technology to get a better picture of the stock by looking at:


To help readers see pass 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.

Advertisement