Zero-debt allows substantial financial flexibility, especially for small-cap companies like Fulgent Genetics Inc (NASDAQ:FLGT), 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 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.
Is FLGT growing fast enough to value financial flexibility over 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. Either FLGT 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. FLGT delivered a negative revenue growth of -9.5%. 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.
Can FLGT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Fulgent Genetics 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 FLGT’s most recent US$3.0m liabilities, the company has been able to meet these obligations given the level of current assets of US$38.2m, with a current ratio of 12.83x. However, anything about 3x may be excessive, since FLGT may be leaving too much capital in low-earning investments.
As a high-growth company, it may be beneficial for FLGT to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, FLGT’s financial situation may change. I admit this is a fairly basic analysis for FLGT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Fulgent Genetics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FLGT’s future growth? Take a look at our free research report of analyst consensus for FLGT’s outlook.
- Valuation: What is FLGT 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 FLGT 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.