The direct benefit for electroCore, Inc. (NASDAQ:ECOR), 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 ECOR 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 ECOR 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.
Does ECOR’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. 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. Either ECOR 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. ECOR’s revenue growth over the past year is a single-digit 6.0% which is relatively low for a small-cap company. More capital can help the business grow faster. If ECOR is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does ECOR’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, electroCore has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of US$4.8m, the company has been able to meet these commitments with a current assets level of US$85m, leading to a 17.82x current account ratio. However, a ratio above 3x may be considered excessive by some investors.
ECOR is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure ECOR has company-specific issues impacting its capital structure decisions. I suggest you continue to research electroCore to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECOR’s future growth? Take a look at our free research report of analyst consensus for ECOR’s outlook.
- Valuation: What is ECOR 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 ECOR is currently mispriced by the market.
- 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 past 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.
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