Is MobileIron, Inc. (NASDAQ:MOBL) A Financially Sound Company?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like MobileIron, Inc. (NASDAQ:MOBL), 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 will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for MobileIron
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. MOBL’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. MOBL’s revenue growth over the past year is a single-digit 7.5% 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.
Can MOBL meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, MobileIron 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$123m, it seems that the business has been able to meet these commitments with a current assets level of US$183m, leading to a 1.49x current account ratio. For Software companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Having no debt on the books means MOBL has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around MOBL’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure MOBL has company-specific issues impacting its capital structure decisions. I suggest you continue to research MobileIron to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MOBL’s future growth? Take a look at our free research report of analyst consensus for MOBL’s outlook.
Valuation: What is MOBL 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 MOBL 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.
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