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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Abeona Therapeutics Inc. (NASDAQ:ABEO), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While ABEO has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ABEO’s financial health.
Does ABEO’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either ABEO 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. ABEO 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.
Does ABEO’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Abeona Therapeutics 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 ABEO’s US$10m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$115m, with a current ratio of 11.09x. Having said that, a ratio greater than 3x may be considered high by some.
As a high-growth company, it may be beneficial for ABEO to have some financial flexibility, hence zero-debt. Since there is also no concerns around ABEO’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I admit this is a fairly basic analysis for ABEO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Abeona Therapeutics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ABEO’s future growth? Take a look at our free research report of analyst consensus for ABEO’s outlook.
- Historical Performance: What has ABEO’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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.