Zero-debt allows substantial financial flexibility, especially for small-cap companies like Gulf Island Fabrication Inc (NASDAQ:GIFI), 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 GIFI 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 GIFI’s financial health.
Does GIFI’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. The lack of debt on GIFI’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 GIFI is a high-growth company. GIFI’s revenue growth over the past year is a single-digit 4.8% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can GIFI meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Gulf Island Fabrication 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 US$52m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.37x. Having said that, a ratio above 3x may be considered excessive by some investors.
Having no debt on the books means GIFI has more financial freedom to keep growing at its current fast rate. 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 be different. I admit this is a fairly basic analysis for GIFI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Gulf Island Fabrication to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GIFI’s future growth? Take a look at our free research report of analyst consensus for GIFI’s outlook.
- Valuation: What is GIFI 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 GIFI 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.
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