Is Johnson Outdoors Inc.’s (NASDAQ:JOUT) Balance Sheet Strong Enough To Weather A Storm?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Johnson Outdoors Inc. (NASDAQ:JOUT), 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. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess JOUT’s financial health.
See our latest analysis for Johnson Outdoors
Is JOUT growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either JOUT 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. A revenue growth in the teens is not considered high-growth. JOUT’s revenue growth of 11% falls into this range. More capital can help the business grow faster. If JOUT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can JOUT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Johnson Outdoors 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. Looking at JOUT’s US$93m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$286m, leading to a 3.08x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Next Steps:
Having no debt on the books means JOUT has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, JOUT’s financial situation may change. I admit this is a fairly basic analysis for JOUT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Johnson Outdoors to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for JOUT’s future growth? Take a look at our free research report of analyst consensus for JOUT’s outlook.
Valuation: What is JOUT 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 JOUT 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.
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.
