The direct benefit for Biomerica Inc (NASDAQ:BMRA), 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 BMRA will have to adhere to stricter debt covenants and have less financial flexibility. While BMRA 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 BMRA’s financial health. Check out our latest analysis for Biomerica
Is BMRA growing fast enough to value 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. The lack of debt on BMRA’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 BMRA is a high-growth company. A revenue growth in the teens is not considered high-growth. BMRA’s revenue growth of 12.68% falls into this range. 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 BMRA pay its short-term liabilities?
Since Biomerica doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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 $0.5M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $4.2M, leading to a 7.96x current account ratio. Though, anything above 3x is considered high and could mean that BMRA has too much idle capital in low-earning investments.
Are you a shareholder? As BMRA’s revenues are not growing at a fast enough pace, not taking advantage of lower cost debt may not be the best strategy. As shareholders, you should try and determine whether this strategy is justified for BMRA, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to account for what the market expects for the company moving forward.
Are you a potential investor? In terms of meeting is short term obligations, there’s nothing to worry about for BMRA. Though, its soft revenue growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure BMRA has company-specific issues impacting its capital structure decisions. For your next step, you should take a look at BMRA’s past performance in order to determine for yourself whether its zero-debt position is justified.
To help readers see pass 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.