Is Movado Group Inc’s (NYSE:MOV) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for Movado Group Inc (NYSE:MOV), 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 MOV will have to adhere to stricter debt covenants and have less financial flexibility. 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 go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Check out our latest analysis for Movado Group
Is MOV 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 MOV’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 MOV is a high-growth company. MOV’s revenue growth in the teens of 13% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If MOV is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does MOV’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Movado Group 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$91m, it seems that the business has been able to meet these obligations given the level of current assets of US$469m, with a current ratio of 5.17x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
MOV is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how MOV has been performing in the past. I recommend you continue to research Movado Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MOV’s future growth? Take a look at our free research report of analyst consensus for MOV’s outlook.
Valuation: What is MOV 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 MOV 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.
