Limelight Networks, Inc. (NASDAQ:LLNW), 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 LLNW will have to follow strict debt obligations which will reduce its financial flexibility. While LLNW has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is LLNW right in choosing 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 LLNW’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 LLNW is a high-growth company. A single-digit revenue growth of 6.1% for LLNW is considerably low for a small-cap company. More capital can help the business grow faster. If LLNW is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can LLNW meet its short-term obligations with the cash in hand?
Since Limelight Networks 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. 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 LLNW’s US$33m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$91m, with a current ratio of 2.76x. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
LLNW is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how LLNW has been performing in the past. I recommend you continue to research Limelight Networks to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LLNW’s future growth? Take a look at our free research report of analyst consensus for LLNW’s outlook.
- Valuation: What is LLNW 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 LLNW 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.
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