The direct benefit for Wave Life Sciences Ltd. (NASDAQ:WVE), 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 WVE 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 WVE 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.
Is WVE growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either WVE 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. WVE 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 WVE meet its short-term obligations with the cash in hand?
Since Wave Life Sciences 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$126m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.85x. Generally, for Pharmaceuticals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
WVE 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 WVE’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure WVE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Wave Life Sciences to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WVE’s future growth? Take a look at our free research report of analyst consensus for WVE’s outlook.
- Historical Performance: What has WVE’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.
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