The direct benefit for SeaChange International, Inc. (NASDAQ:SEAC), 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 SEAC will have to adhere to stricter debt covenants and have less financial flexibility. While SEAC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess SEAC’s financial health.
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Does SEAC’s growth rate justify its decision for 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 SEAC’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 SEAC is a high-growth company. SEAC delivered a negative revenue growth of -16%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can SEAC pay its short-term liabilities?
Since SeaChange International 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$17m, it appears that the company has been able to meet these commitments with a current assets level of US$51m, leading to a 2.94x current account ratio. Generally, for Software companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means SEAC has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around SEAC’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how SEAC has been performing in the past. I suggest you continue to research SeaChange International to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SEAC’s future growth? Take a look at our free research report of analyst consensus for SEAC’s outlook.
- Historical Performance: What has SEAC’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 firstname.lastname@example.org.