The direct benefit for PolarityTE Inc (NASDAQ:COOL), 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 COOL will have to adhere to stricter debt covenants and have less financial flexibility. While COOL has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is COOL right in choosing 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 COOL’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 COOL is a high-growth company. COOL delivered a negative revenue growth of -102%. 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.
Does COOL’s liquid assets cover its short-term commitments?
Since PolarityTE doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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. Looking at COOL’s most recent US$3.0m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$38.2m, leading to a 12.7x current account ratio. Though, anything about 3x may be excessive, since COOL may be leaving too much capital in low-earning investments.
COOL 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 COOL’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, COOL’s financial situation may change. This is only a rough assessment of financial health, and I’m sure COOL has company-specific issues impacting its capital structure decisions. You should continue to research PolarityTE to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for COOL’s future growth? Take a look at our free research report of analyst consensus for COOL’s outlook.
- Historical Performance: What has COOL’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.
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