Zero-debt allows substantial financial flexibility, especially for small-cap companies like OraSure Technologies Inc (NASDAQ:OSUR), 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 OSUR 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.
Is financial flexibility worth the 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. Either OSUR does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. OSUR’s revenue growth over the past year is a double-digit 30% 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.
Does OSUR’s liquid assets cover its short-term commitments?
Since OraSure Technologies 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. With current liabilities at US$21m, it appears that the company has been able to meet these obligations given the level of current assets of US$202m, with a current ratio of 9.58x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue OSUR could be holding too much capital in a low-return investment environment.
As a high-growth company, it may be beneficial for OSUR to have some financial flexibility, hence zero-debt. Since there is also no concerns around OSUR’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for OSUR’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research OraSure Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OSUR’s future growth? Take a look at our free research report of analyst consensus for OSUR’s outlook.
- Valuation: What is OSUR 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 OSUR 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.