The direct benefit for Vical Incorporated (NASDAQ:VICL), 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 VICL 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 VICL 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 VICL right in choosing 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. Either VICL does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. Opposite to the high growth we were expecting, VICL’s negative revenue growth of -58% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can VICL meet its short-term obligations with the cash in hand?
Since Vical 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 VICL’s US$3.5m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 14.86x. However, many consider a ratio above 3x to be high.
As a high-growth company, it may be beneficial for VICL to have some financial flexibility, hence zero-debt. Since there is also no concerns around VICL’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure VICL has company-specific issues impacting its capital structure decisions. You should continue to research Vical to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VICL’s future growth? Take a look at our free research report of analyst consensus for VICL’s outlook.
- Historical Performance: What has VICL’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.
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