Zero-debt allows substantial financial flexibility, especially for small-cap companies like POET Technologies Inc (CVE:PTK), 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. While PTK has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. 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 PTK growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on PTK’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 PTK is a high-growth company. PTK’s revenue growth over the past year is a single-digit 8.0% which is relatively low for a small-cap company. More capital can help the business grow faster. If PTK is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can PTK meet its short-term obligations with the cash in hand?
Since POET Technologies 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. Looking at PTK’s most recent US$2m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$13m, leading to a 6.55x current account ratio. However, many consider anything above 3x to be quite high.
PTK is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around PTK’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure PTK has company-specific issues impacting its capital structure decisions. I recommend you continue to research POET Technologies to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PTK’s future growth? Take a look at our free research report of analyst consensus for PTK’s outlook.
- Historical Performance: What has PTK’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.
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