Issuer Direct Corporation (AMEX:ISDR), 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 ISDR 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 ISDR has outstanding financial strength. I recommend you look at the following hurdles to assess ISDR’s financial health. See our latest analysis for Issuer Direct
Does ISDR’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ISDR 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. A single-digit revenue growth of 3.78% for ISDR is considerably low for a small-cap company. More capital can help the business grow faster. If ISDR is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does ISDR’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Issuer Direct 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. Looking at ISDR’s most recent $2.1M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $6.8M, with a current ratio of 3.24x. Though, a ratio greater than 3x may be considered as too high, as ISDR could be holding too much capital in a low-return investment environment.
Given that Issuer Direct is a relatively low-growth company, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for ISDR, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how ISDR has been performing in the past. You should continue to research Issuer Direct to get a more holistic view of the stock by looking at:
1. Valuation: What is ISDR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ISDR is currently mispriced by the market.
2. Historical Performance: What has ISDR’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.
3. 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.