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The direct benefit for Hi Sun Technology (China) Limited (HKG:818), 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 818 will have to adhere to stricter debt covenants and have less financial flexibility. While 818 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.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. 818’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. 818’s revenue growth over the past year is an impressively high double-digit 62%. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can 818 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Hi Sun Technology (China) 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 HK$1.7b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
818 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how 818 has been performing in the past. I suggest you continue to research Hi Sun Technology (China) to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 818’s future growth? Take a look at our free research report of analyst consensus for 818’s outlook.
- Valuation: What is 818 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 818 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.