Park Electrochemical Corp (NYSE:PKE), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is PKE will have to follow strict debt obligations which will reduce its 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.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. PKE’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. PKE’s revenue growth over the past year is a single-digit 3.9% 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 PKE pay its short-term liabilities?
Since Park Electrochemical 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. 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. At the current liabilities level of US$13.1m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.89x. However, many consider anything above 3x to be quite high and could mean that PKE has too much idle capital in low-earning investments.
Having no debt on the books means PKE has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around PKE’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for PKE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Park Electrochemical to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PKE’s future growth? Take a look at our free research report of analyst consensus for PKE’s outlook.
- Valuation: What is PKE 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 PKE 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 email@example.com.