Zero-debt allows substantial financial flexibility, especially for small-cap companies like InspireMD, Inc. (NYSEMKT:NSPR), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean NSPR 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.
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. NSPR’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. NSPR’s revenue growth over the past year is an impressively high double-digit 61%. 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 NSPR’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, InspireMD has no solvency issues, which is 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. Looking at NSPR’s US$2.4m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$13m, leading to a 5.51x current account ratio. Having said that, many consider a ratio above 3x to be high.
As a high-growth company, it may be beneficial for NSPR 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. Moving forward, NSPR’s financial situation may change. I admit this is a fairly basic analysis for NSPR’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research InspireMD to get a more holistic view of the stock by looking at:
- Historical Performance: What has NSPR’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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