Zero-debt allows substantial financial flexibility, especially for small-cap companies like Marchex Inc (NASDAQ:MCHX), 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 MCHX has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess MCHX’s financial health.
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. MCHX’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. Opposite to the high growth we were expecting, MCHX’s negative revenue growth of -18.5% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can MCHX meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Marchex 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. Looking at MCHX’s most recent US$12.1m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$94.4m, with a current ratio of 7.81x. However, anything above 3x is considered high and could mean that MCHX has too much idle capital in low-earning investments.
As a high-growth company, it may be beneficial for MCHX to have some financial flexibility, hence zero-debt. Since there is also no concerns around MCHX’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I admit this is a fairly basic analysis for MCHX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Marchex to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MCHX’s future growth? Take a look at our free research report of analyst consensus for MCHX’s outlook.
- Valuation: What is MCHX 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 MCHX 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.
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