The direct benefit for Cryoport Inc (NASDAQ:CYRX), 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 CYRX will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will take you through a few basic checks to assess the financial health of companies with no debt.
Does CYRX’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on CYRX’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 CYRX is a high-growth company. CYRX’s revenue growth over the past year is an impressively high double-digit 52.3%. 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 CYRX’s liquid assets cover its short-term commitments?
Since Cryoport 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. With current liabilities at US$3.1m, it appears that the company has been able to meet these obligations given the level of current assets of US$24.2m, with a current ratio of 7.73x. Though, a ratio greater than 3x may be considered as too high, as CYRX could be holding too much capital in a low-return investment environment.
As a high-growth company, it may be beneficial for CYRX to have some financial flexibility, hence zero-debt. Since there is also no concerns around CYRX’s liquidity needs, this may be its optimal capital structure for the time being. In the future, CYRX’s financial situation may change. This is only a rough assessment of financial health, and I’m sure CYRX has company-specific issues impacting its capital structure decisions. You should continue to research Cryoport to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CYRX’s future growth? Take a look at our free research report of analyst consensus for CYRX’s outlook.
- Valuation: What is CYRX 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 CYRX 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.