Zero-debt allows substantial financial flexibility, especially for small-cap companies like OptimizeRx Corporation (NASDAQ:OPRX), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean OPRX has outstanding 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 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. The lack of debt on OPRX’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 OPRX is a high-growth company. OPRX’s revenue growth over the past year is an impressively high double-digit 79%. 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.
Does OPRX’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, OptimizeRx has no solvency issues, which is 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 OPRX’s most recent US$3m liabilities, the company has been able to meet these commitments with a current assets level of US$18m, leading to a 6.23x current account ratio. However, many consider anything above 3x to be quite high and could mean that OPRX has too much idle capital in low-earning investments.
OPRX is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure OPRX has company-specific issues impacting its capital structure decisions. I recommend you continue to research OptimizeRx to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OPRX’s future growth? Take a look at our free research report of analyst consensus for OPRX’s outlook.
- Valuation: What is OPRX 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 OPRX 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 firstname.lastname@example.org.