The direct benefit for ENGlobal Corporation (NASDAQ:ENG), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ENG will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ENG has outstanding 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. View our latest analysis for ENGlobal
Does ENG’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on ENG’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 ENG is a high-growth company. ENG delivered a negative revenue growth of -25.60%. 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.
Does ENG’s liquid assets cover its short-term commitments?
With current liabilities at US$7.62M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.91x. Though, a ratio greater than 3x may be considered as too high, as ENG could be holding too much capital in a low-return investment environment.
Given that ENGlobal is a relatively low-growth company, having no debt on its balance sheet isn’t necessarily the best thing. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how ENG has been performing in the past. I suggest you continue to research ENGlobal to get a better picture of the stock by looking at:
- 1. Historical Performance: What has ENG’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.
- 2. 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 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.