Luminex Corporation (NASDAQ:LMNX), 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 LMNX will have to follow strict debt obligations which will reduce its financial flexibility. While LMNX has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 LMNX’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. LMNX’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. LMNX’s revenue growth over the past year is a single-digit 4.1% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does LMNX’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Luminex 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 LMNX’s US$39m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.6x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
As a high-growth company, it may be beneficial for LMNX to have some financial flexibility, hence zero-debt. Since there is also no concerns around LMNX’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for LMNX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Luminex to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LMNX’s future growth? Take a look at our free research report of analyst consensus for LMNX’s outlook.
- Valuation: What is LMNX 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 LMNX 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.
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 email@example.com.