Is Navigant Consulting Inc (NYSE:NCI) A Financially Sound Company?
The direct benefit for Navigant Consulting Inc (NYSE:NCI), 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 NCI will have to adhere to stricter debt covenants and have less financial flexibility. While NCI 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.
View our latest analysis for Navigant Consulting
Does NCI’s growth rate justify its decision for financial flexibility over 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. NCI’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. NCI’s revenue growth over the past year is a double-digit 33% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can NCI meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Navigant Consulting has no solvency issues, which is 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. With current liabilities at US$173m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.81x. Generally, for Professional Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
As a high-growth company, it may be beneficial for NCI to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. I admit this is a fairly basic analysis for NCI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Navigant Consulting to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NCI’s future growth? Take a look at our free research report of analyst consensus for NCI’s outlook.
Valuation: What is NCI 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 NCI 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 editorial-team@simplywallst.com.
