The direct benefit for LightInTheBox Holding Co Ltd (NYSE:LITB), 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 LITB 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 LITB has outstanding financial strength. I recommend you look at the following hurdles to assess LITB’s financial health.
Is LITB right in choosing 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. The lack of debt on LITB’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 LITB is a high-growth company. LITB’s revenue growth over the past year is a single-digit 6.5% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does LITB’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, LightInTheBox Holding 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. At the current liabilities level of US$52.3m liabilities, the company has been able to meet these commitments with a current assets level of US$89.5m, leading to a 1.71x current account ratio. For Online Retail companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Having no debt on the books means LITB has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around LITB’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, LITB’s financial situation may change. This is only a rough assessment of financial health, and I’m sure LITB has company-specific issues impacting its capital structure decisions. I recommend you continue to research LightInTheBox Holding to get a more holistic view of the stock by looking at:
- Valuation: What is LITB 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 LITB is currently mispriced by the market.
- Historical Performance: What has LITB’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 email@example.com.