Zero-debt allows substantial financial flexibility, especially for small-cap companies like RiceBran Technologies (NASDAQ:RIBT), 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 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 recommend you look at the following hurdles to assess RIBT’s financial health. See our latest analysis for RIBT
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. RIBT’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. RIBT’s revenue growth over the past year is a double-digit 35.86% which is considerably high for a small-cap company. 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 RIBT meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, RIBT could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for RIBT’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that RIBT is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Are you a shareholder? As a high-growth company, it may be beneficial for RIBT to have some financial flexibility, hence zero-debt. Though, its lack of liquidity reduces our confidence around meeting short-term obligations. Some level of low-cost debt funding could help address these needs. ] %} Going forward, its financial position may be different. I suggest researching market expectations for RIBT’s future growth.
Are you a potential investor? RIBT’s high growth makes financial flexibility an attractive option. However, in the event of adversity, the company may be pressed to meet its short-term obligations due to its low-liquidity asset composition. You should continue your analysis by taking a look at RIBT’s past performance to figure out RIBT’s financial health position.
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.