What Investors Should Know About Vicor Corporation’s (NASDAQ:VICR) Financial Strength
Vicor Corporation (NASDAQ:VICR), 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 VICR will have to follow strict debt obligations which will reduce its financial flexibility. While VICR 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.
View our latest analysis for Vicor
Is financial flexibility worth the 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. VICR’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. A double-digit revenue growth of 27% is considered relatively high for a small-cap company like VICR. 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.
Can VICR pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Vicor 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$31m, it seems that the business has been able to meet these obligations given the level of current assets of US$161m, with a current ratio of 5.23x. Having said that, anything above 3x may be considered excessive by some investors. They might argue VICR is leaving too much capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for VICR to have some financial flexibility, hence zero-debt. Since there is also no concerns around VICR’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how VICR has been performing in the past. You should continue to research Vicor to get a better picture of the stock by looking at:
Historical Performance: What has VICR’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
