The direct benefit for Mirati Therapeutics Inc (NASDAQ:MRTX), 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 MRTX will have to adhere to stricter debt covenants and have less financial flexibility. While MRTX 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 MRTX’s financial health.
Does MRTX’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. MRTX’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.
Can MRTX pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Mirati Therapeutics 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. At the current liabilities level of US$18.1m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$263.6m, with a current ratio of 14.54x. Though, a ratio greater than 3x may be considered as too high, as MRTX could be holding too much capital in a low-return investment environment.
Having no debt on the books means MRTX 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. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for MRTX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Mirati Therapeutics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MRTX’s future growth? Take a look at our free research report of analyst consensus for MRTX’s outlook.
- Historical Performance: What has MRTX’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.