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Advaxis, Inc. (NASDAQ:ADXS), 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 ADXS 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 ADXS has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Does ADXS’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. The lack of debt on ADXS’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 ADXS is a high-growth company. ADXS delivered a negative revenue growth of -50%. 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.
Can ADXS pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Advaxis 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$23m, it appears that the company has been able to meet these commitments with a current assets level of US$50m, leading to a 2.21x current account ratio. For Biotechs companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
As a high-growth company, it may be beneficial for ADXS to have some financial flexibility, hence zero-debt. Since there is also no concerns around ADXS’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, ADXS’s financial situation may change. Keep in mind I haven’t considered other factors such as how ADXS has been performing in the past. You should continue to research Advaxis to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADXS’s future growth? Take a look at our free research report of analyst consensus for ADXS’s outlook.
- Historical Performance: What has ADXS’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 firstname.lastname@example.org.