Are Eyecarrot Innovations Corp.’s (CVE:EYC) Interest Costs Too High?
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The direct benefit for Eyecarrot Innovations Corp. (CVE:EYC), 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 EYC 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 EYC 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 Eyecarrot Innovations
Is EYC right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. EYC’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. EYC delivered a strikingly high triple-digit revenue growth over the past year, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can EYC meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Eyecarrot Innovations 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 CA$725k, it appears that the company has been able to meet these commitments with a current assets level of CA$4.1m, leading to a 5.59x current account ratio. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
EYC is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around EYC’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, EYC’s financial situation may change. I admit this is a fairly basic analysis for EYC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Eyecarrot Innovations to get a more holistic view of the stock by looking at:
Historical Performance: What has EYC’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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.