The direct benefit for Immune Design Corp. (NASDAQ:IMDZ), 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 IMDZ will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean IMDZ has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Does IMDZ’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. 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. IMDZ’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. IMDZ delivered a negative revenue growth of -75%. 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 IMDZ pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Immune Design 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$8.6m, it appears that the company has been able to meet these obligations given the level of current assets of US$112m, with a current ratio of 13.11x. However, a ratio greater than 3x may be considered high by some.
IMDZ 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 IMDZ’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how IMDZ has been performing in the past. I recommend you continue to research Immune Design to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IMDZ’s future growth? Take a look at our free research report of analyst consensus for IMDZ’s outlook.
- Historical Performance: What has IMDZ’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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