Zero-debt allows substantial financial flexibility, especially for small-cap companies like Chuy’s Holdings Inc (NASDAQ:CHUY), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CHUY has outstanding financial strength. I recommend you look at the following hurdles to assess CHUY’s financial health.
Is CHUY right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. CHUY’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. CHUY’s revenue growth in the teens of 13% is not considered as high-growth, especially 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.
Does CHUY’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Chuy’s Holdings 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 CHUY’s most recent US$25m liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$22m, with a current ratio of 0.86x.
CHUY is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Though, the company’s low liquidity lowers our conviction around meeting short-term obligations. Some level of low-cost debt funding could help meet these needs. In the future, its financial position may change. I admit this is a fairly basic analysis for CHUY’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chuy’s Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CHUY’s future growth? Take a look at our free research report of analyst consensus for CHUY’s outlook.
- Valuation: What is CHUY 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 CHUY 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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