Gencor Industries Inc (NASDAQ:GENC), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is GENC will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean GENC has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is GENC growing fast enough to value 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 GENC’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 GENC is a high-growth company. A double-digit revenue growth of 25.7% is considered relatively high for a small-cap company like GENC. 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 GENC pay its short-term liabilities?
Since Gencor Industries 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$9.4m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$139.9m, leading to a 14.95x current account ratio. Though, anything about 3x may be excessive, since GENC may be leaving too much capital in low-earning investments.
GENC 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 GENC’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I admit this is a fairly basic analysis for GENC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Gencor Industries to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GENC’s future growth? Take a look at our free research report of analyst consensus for GENC’s outlook.
- Historical Performance: What has GENC’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.
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.