What You Must Know About Osprey Medical, Inc.’s (ASX:OSP) Financial Strength
The direct benefit for Osprey Medical, Inc. (ASX:OSP), 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 OSP will have to adhere to stricter debt covenants and have less financial flexibility. While OSP has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for Osprey Medical
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. The lack of debt on OSP’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 OSP is a high-growth company. OSP’s revenue growth over the past year is an impressively high double-digit 96%. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can OSP pay its short-term liabilities?
Since Osprey Medical 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. With current liabilities at US$1.5m, the company has been able to meet these obligations given the level of current assets of US$25m, with a current ratio of 16.35x. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
Having no debt on the books means OSP 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 OSP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Osprey Medical to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for OSP’s future growth? Take a look at our free research report of analyst consensus for OSP’s outlook.
Historical Performance: What has OSP’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 editorial-team@simplywallst.com.
