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NVE Corporation (NASDAQ:NVEC), 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 NVEC will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean NVEC has outstanding financial strength. I recommend you look at the following hurdles to assess NVEC’s financial health.
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. NVEC’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. A single-digit revenue growth of 0.5% for NVEC is considerably low for a small-cap company. More capital can help the business grow faster. If NVEC is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can NVEC pay its short-term liabilities?
Since NVE 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. At the current liabilities level of US$1.6m liabilities, the company has been able to meet these obligations given the level of current assets of US$38.7m, with a current ratio of 23.93x. However, anything above 3x may be considered excessive by some investors. They might argue NVEC is leaving too much capital in low-earning investments.
Having no debt on the books means NVEC has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around NVEC’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I admit this is a fairly basic analysis for NVEC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research NVE to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NVEC’s future growth? Take a look at our free research report of analyst consensus for NVEC’s outlook.
Valuation: What is NVEC 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 NVEC 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.